Question

Describe and illustrate the adjusting process for a merchandising business.

Answer 1

The process of recording all adjusting entries at the accounting year end to bring the asset, liability, revenue and expense account to match with their proper balance under accrual basis of accounting is called adjusting process.

In case of merchandise business balance of inventory as per the books and actual inventory may differ due to theft, mishandling of inventory or inventory lost in transit etc. Due to this actual inventory will be less than the merchandise inventory. This difference is called inventory shortage or inventory shortage.

For example:

Merchandise inventory at the year end                          $ 50,000

Physical inventory                                                      $ 49,000

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Inventory shortage                                                 $ 1,000               

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This shrinkage is shown as operating cost in the income statement if the amount is low and if the amount is large then it may be shown separately in the income statement. If the amount is large then a separate account has to be maintained.