Property accounts are usually named in such a way as to indicate the nature of the asset or liability. Rule for Nominal Accounts. A nominal account shows a loss if the debit side is the larger and a profit if the credit side is the larger. The expense account is a nominal account that always shows a loss, as it represents money paid out for carrying on the business. If there is anything of value unused, it is a mixed account and also shows an asset. The Merchandise Account, A NOMINAL ACCOUNT. The merchandise account is debited for the goods bought and credited for the goods sold. If all the goods have been sold, the Merchandise account shows a profit if the credit side is the larger and a loss if the debit side is the larger. The Merchandise Account, A MIXED ACCOUNT. In any continuous business, some goods are left on hand at the end of the period for which the profit or loss on merchandise is to be found. These goods on hand are called the inventory of merchandise. That makes the merchandise account a mixed account. Inventory of Merchandise. The Inventory of Merchandise may be found by taking inventory or taking stock. The merchandise on hand is listed on cards, or loose-leaf sheets, or in a book. It is then computed at the cost price, if it is in a good salable condition. If the goods are shopworn, out of season, out of style or for some other reason will sell for less than cost, they should be computed at the present value. The inventory may be found, in most businesses by keeping a perpetual inventory book, which shows the merchandise of each kind purchased, sold, and the balance on hand. The inventory is the real element in the merchandise account. It is property. It is an asset. The nominal or profit and loss element must be found. How to Find the Profit or Loss on Merchandise. There are two methods of finding the nominal element, the profit or loss on merchandise. By one method, the inventory is subtracted from the debit side, which is the cost of all the goods. The difference is the cost of the goods sold. This result is subtracted from the credit side, which is the value of the goods sold. The difference is the profit on Merchandise. If the cost of the goods sold is greater than the selling price, the result is the loss on merchandise. Expressed in brief form, it would be: Credit (Debit-Inventory)=Profit, or, The account method is another method very commonly used, because it is easier to show addition in the ledger accounts than subtraction. By this method, the inventory is added to the value of the goods sold. From this result, the debit is subtracted. The difference is a profit. Or, if the debit is the larger, the difference is a loss. Expressed as a formula, it would be: Credit+Inventory- Debit= Profit, or, The trial balance of the Model Ledger will now be analyzed and the accounts classified. Analysis of Model Ledger. S. N. Boden's account is debited for the money withdrawn from the business and credited for his investment. It is a real account and shows a liability of the business to the proprietor. Merchandise account is debited for the goods bought and credited for the goods sold. Before ascertaining what the account shows, an inventory must be taken. The inventory value is taken to be $809.25. The account is a mixed account and the nominal or profit and loss element must be found. The account, then, shows a profit of $130.75 and a real element, the inventory, of $809.25. Expense is debited for anything paid out to carry on the business. It is a nominal account and shows a loss. out. Cash is debited for the cash received and credited for the cash paid B. D. Foley's account is credited for the value of the goods bought of him on account and debited for the amount paid by the business on account. It is a real account and shows a liability. C. S. Baxter's account is debited for the value of the goods sold him on account and credited for the amount received from him on account. It is a real account and shows an asset. T. A. Carr's account is analyzed the same as B. D. Foley's. C. D. Sand's account is credited for the value of the goods bought of him on account. Nothing has been paid on it. It is a real account and shows a liability. Exercise 8. First, as an oral exercise analyze the trial balance of Set I. Use $142.50 as the inventory of goods on hand. Then, write out your analysis of each account in the trial balance. The analysis should state the reason for the debit and for the credit, classify the account, and state what the account shows. Exercise 9. Analyze in writing the trial balance of Set II. Use $275 as the inventory of goods on hand. Exercise 10. Find the profit or loss on merchandise. Your teacher a) The debit side of Merchandise is $896.40; the credit side is $975.50. All the goods have been sold. b) Merchandise Debit, $1275.15; Merchandise Credit, $926.35; Inventory, $389.25. c) Merchandise Debit, $726.45; Merchandise Credit, $801.50; Inventory, $45.60. d) Merchandise Debit, $647.55; Merchandise Credit, $501.95; Inventory, $110.40. Exercise 11. Review. Enter Review. Enter the following transactions in the proper books. Use one page as a journal and two opposite pages as a cash book. December 1. C. S. Hunter invests $1500 cash in the business. 3. 5. Bought an invoice of merchandise of S. G. Porth, for cash, $217.25. 7. Bought an invoice of merchandise of G. E. Leeds, on account, $167.45. 9. Sold an invoice of merchandise to D. C. Hart, on account, $93.75. Paid $5.75 for one ton of coal. Sold an invoice of merchandise to B. E. Brand, on account, $82.15. Paid G. E. Leeds, on account, $125. 12. 13. 15. 16. 17. Bought an invoice of goods of D. A. Carson, on account, $212.35. 20. Received $60 of B. E. Brand, on account. 22. 24. Received of D. C. Hart, on account, $75. Paid G. E. Leeds, the balance of the invoice of the 7th, $42.45. Sold an invoice of merchandise to C. G. Gorman, for cash, $65.50. 27. 28. Sold an invoice of merchandise to D. C. Hart, on account, $115.75. Received of B. E. Brand the balance of his account, $22.15. 31. Paid clerk's salary, $24. Inventory of Merchandise, $263.25. Post the journal. Post the cash book. Take a trial balance of the ledger. CHAPTER VII STATEMENTS At the end of certain regular periods, statements are made out to exhibit the profits and the losses, the assets and the liabilities, and the present condition of the business. In most businesses these statements are made out annually at the end of the business year. In many they Six-Column Statement, Jan. 31,19 23675 11645 194895194895 |