Recording consolidating adjustment journal entries
Under the perpetual inventory method, we compare the physical inventory count value to the unadjusted trial balance amount for inventory.
If there is a difference (there almost always is for a variety of reasons including theft, damage, waste, or error), an adjusting entry must be made.
We learned how the accounting cycle applies to a service company but guess what? We spent the last section discussing the journal entries for sales and purchase transactions.
Now we will look how the remaining steps are used in a merchandising company.
This is because in each financial year the Profit & Loss essentially begins again, but the Balance Sheet carries on.
The balance of all P & L accounts is transferred to the Accumulated Profit account as part of the year end process.
Previous year journals are used to make corrections to your accounts after you have processed a year end.
Previous year journal values are recorded differently depending on whether journals are posted to Balance Sheet or Profit and Loss accounts.
The physical inventory is used to calculate the amount of the adjustment.Thus, every adjusting entry affects at least one income statement account and one balance sheet account.Adjusting entries fall into two broad classes: accrued (meaning to grow or accumulate) items and deferred (meaning to postpone or delay) items.Those wonderful adjusting entries we learned in previous sections still apply.Adjusting entries reflect unrecorded economic activity that has taken place but has not yet been recorded because it is either more convenient to wait until the end of the period to record the activity, or because no source document concerning that activity has yet come to the accountant’s attention.
The parent places those assets that qualify on its own balance sheet at fair value to show that a portion of the amount paid for the subsidiary was the equivalent of an acquisition price for these items.