P7 (App 5A): Periodic Worksheet | ACCOUNTING ESSENTIALS

🎯 Learning Objectives

Understand the purpose of the periodic inventory worksheet
Prepare adjusting entries for beginning and ending inventory
Complete the worksheet columns (adjustments, income statement, balance sheet)
Calculate net income or loss using worksheet totals
Prepare closing entries from worksheet information

📚 Background & Principles

The periodic worksheet helps organize the year-end adjusting and closing process for merchandising companies. It reconciles the beginning inventory (frozen since Jan 1) with the physical count ending inventory.

Core Principle: The worksheet uses the "Wipe and Replace" method for inventory: (1) Remove beginning inventory (credit old balance, debit Income Summary), then (2) Add ending inventory (debit new balance, credit Income Summary).

The worksheet columns track how inventory adjustments flow through to the Income Summary, enabling calculation of net income before formal journal entries are posted.

💡 Key Insight: The worksheet is like a financial "dress rehearsal." It shows you what your financial statements will look like before you actually make the adjusting and closing entries in the ledger.

🔑 Key Concepts

Beginning Inventory Adjustment

Removing the Jan 1 inventory balance to Income Summary. Credit Inventory, Debit Income Summary.

Ending Inventory Adjustment

Recording the physical count ending inventory. Debit Inventory, Credit Income Summary.

Income Summary Balance

After both adjustments, Income Summary shows the net effect: Beginning Inventory + Net Purchases - Ending Inventory = COGS.

Worksheet Columns

Unadjusted Trial Balance → Adjustments → Adjusted Trial Balance → Income Statement → Balance Sheet.

Wipe and Replace

Two-step process: Credit old inventory (wipe), then Debit new inventory (replace).

Net Income Calculation

Income Statement column totals: Revenue (Cr) - Expenses (Dr) = Net Income (if Credit > Debit).

🔍 Deep Dive

Explore periodic worksheets at different levels of depth:

🟢 Foundational Level

Understanding the "Whiteboard Wipe" concept.

The Whiteboard Analogy

Analogy: Fixing a Mistake on the Whiteboard

Imagine the Inventory account is a number written on a whiteboard on January 1st that you CAN'T erase during the year.

The Problem:

On December 31st, you count your actual inventory and it's different from what's on the whiteboard. You need to fix it.

Step 1: Wipe (Remove old number)

Credit Inventory $10,000 (removes the old number)

Debit Income Summary $10,000 (temporarily holds the old amount)

Step 2: Replace (Write new number)

Debit Inventory $12,000 (writes the new count)

Credit Income Summary $12,000 (adjusts for the difference)

🚫 Wipe Old

Credit Inventory

Entry:

Dr: IS $10,000

Cr: Inv $10,000

✅ Write New

Debit Inventory

Entry:

Dr: Inv $12,000

Cr: IS $12,000

🟡 Standard Level

Completing the worksheet columns step by step.

Worksheet Column Logic

Given: Beginning Inventory $10,000, Ending Inventory (physical count) $12,000

Account	Adjustments		Income Statement
	Dr	Cr	Dr	Cr
Inventory (Beg)		$10,000	$10,000
Income Summary	$10,000	$12,000		$12,000
Net Effect on IS			$10,000	$12,000

Interpretation: Income Summary has a $2,000 credit balance ($12,000 - $10,000), which represents the reduction in COGS from having more ending inventory than beginning.

Full Closing Process

Step 1: Close Revenue to Income Summary

Debit: Sales Revenue [Total]
Credit: Income Summary [Total]

Step 2: Close Expenses to Income Summary

Debit: Income Summary [Total Expenses]
Credit: Each Expense Account [Individual amounts]

Step 3: Close Income Summary to Retained Earnings

Debit: Income Summary [Net Income]
Credit: Retained Earnings [Net Income]

🔴 Advanced Level

Complete worksheet with multiple accounts and analysis.

Full Periodic Worksheet Example

Given Trial Balance (partial): Sales $150,000, Purchases $80,000, Purchase Returns $3,000, Freight-In $2,500, Beginning Inventory $10,000, Expenses $25,000, Ending Inventory $12,000

Account	Unadjusted Dr	Unadjusted Cr	Adj Dr	Adj Cr	Adj Dr	Adj Cr	IS Dr	IS Cr	BS Dr
Inventory	$10,000			$10,000					$12,000
Purchases	$80,000				$80,000		$80,000
Purchase Returns		$3,000				$3,000		$3,000
Freight-In	$2,500				$2,500		$2,500
Sales		$150,000				$150,000		$150,000
Expenses	$25,000				$25,000		$25,000
Income Summary			$10,000	$12,000	$10,000	$12,000	$10,000	$12,000
TOTALS							$117,500	$165,000

Net Income = $165,000 - $117,500 = $47,500

Check: Sales $150,000 + Purchase Returns $3,000 - Purchases $80,000 - Freight-In $2,500 - Expenses $25,000 + Beginning $10,000 - Ending $12,000 = $42,500 (Note: COGS = Beg + Net Purch + Freight - End = $10,000 + $77,000 + $2,500 - $12,000 = $77,500; Net Income = $150,000 - $77,500 - $25,000 = $47,500)

🎨 Interactive: Periodic Worksheet Simulator

Click through the steps to see how inventory adjustments flow through the worksheet.

Account	Adjustments		Income Statement		Balance Sheet
	Dr	Cr	Dr	Cr	Dr	Cr
Inventory (Beg: $10,000)	-	-	-	-	-	-
Income Summary	-	-	-	-	-	-
Sales Revenue	-	-	-	$150,000	-	-
COGS / Purchases	-	-	$77,500	-	-	-
Expenses	-	-	$25,000	-	-	-
TOTALS	-	-	-	-	-	-

Step 0 - Initial State: The worksheet starts with the unadjusted trial balance. Beginning inventory shows $10,000 (from Jan 1).

🚫 Common Misconceptions & Professional Tips

❌ Misconception 1: "The Inventory account is adjusted directly."

✅ Reality: The Inventory adjustments go through Income Summary. You Credit Inventory to remove the old balance, then Debit Inventory to establish the new balance. Income Summary captures the net effect.

❌ Misconception 2: "Beginning inventory appears on the balance sheet."

✅ Reality: Beginning inventory is REMOVED from the worksheet (credited) and flows through Income Summary as part of COGS. Only Ending Inventory appears on the Balance Sheet.

❌ Misconception 3: "The worksheet replaces the financial statements."

✅ Reality: The worksheet is a WORKING DOCUMENT that helps prepare statements. The formal Income Statement and Balance Sheet are prepared using the final worksheet figures, but the worksheet itself is not a published statement.

💡 Professional Tip #1: Always verify that the adjustments column balances (Dr = Cr) before proceeding to income statement columns.

💡 Professional Tip #2: The difference between Income Statement Debit and Credit columns should equal the difference between Balance Sheet Debit and Credit columns (net income or loss).

💡 Professional Tip #3: Use the worksheet to identify errors early. If columns don't balance, trace each number back to its source.

🧠 Memory Aids & Quick Reference

⚡ Quick Recall: Wipe and Replace

Step 1 (Wipe): Credit Inventory (Beg), Debit Income Summary

Step 2 (Replace): Debit Inventory (End), Credit Income Summary

Net Effect: Income Summary shows Beginning - Ending = effect on COGS

🚫 Wipe Old

Cr: Inventory (Beg), Dr: Income Summary

✅ Write New

Dr: Inventory (End), Cr: Income Summary

📊 Worksheet Flow

TB → Adjustments → IS → BS

💰 Net Income Check

IS Cr - IS Dr = BS Dr - BS Cr

📖 Glossary

Periodic Worksheet

Work sheet tool used to organize adjusting and closing entries for merchandising companies using periodic inventory.

Wipe and Replace

Two-step inventory adjustment: Credit old beginning balance to remove it, then Debit new ending balance.

Income Summary Account

Temporary account that captures the net effect of inventory adjustments and is closed to Retained Earnings.

Adjustments Column

Worksheet column for recording adjusting entries, including inventory adjustments.

Income Statement Column

Worksheet column accumulating revenue and expense balances for net income calculation.

Balance Sheet Column

Worksheet column for asset, liability, and equity balances after adjustments.

Net Income Verification

Mathematical check: (IS Cr - IS Dr) must equal (BS Dr - BS Cr).

Worksheet Balancing

Ensuring total debits equal total credits in each worksheet column pair.

Periodic Worksheet (App 5A)