The posting of this entry automatically clears the Inventory account and, by its addition to Purchases, causes that account to show the “total goods to be accounted for.” Purchases, as it now stands, contains both the cost of goods which have been sold during the current period and those which are still on hand as shown by the inventory just taken. Accordingly, to separate the two items, the following journal entry is necessary:

This entry when posted shows in the Merchandise Inventory account the asset element, and leaves in the Purchases account the cost of the merchandise sold. The effect of these two entries, then, is to adjust the books to true conditions so far as the merchandise is concerned.

Depreciation, and Loss on Doubtful Accounts.—As indicated in [Chapter XV], the amount of depreciation of particular assets and the losses due to bad and doubtful accounts are carefully estimated at the close of the fiscal period. The individual depreciation items are all summarized in a single depreciation account—an expense account—whose total debit is closed out to Profit and Loss. The depreciation reserves, however, which are credit items, are handled under separate account titles, and constitute the valuation account of the corresponding assets. The journal entry covering depreciation reads as follows:

The Reserve for Doubtful Accounts is the valuation account of Accounts and Notes Receivable. Assume, for instance, that the debit balances of the latter two accounts are $15,900, and the credit balance of their valuation account is $600. The difference between these two accounts, viz., $15,300, represents the present estimated value of Accounts and Notes Receivable. The journal entry made periodically to record the estimated loss from uncollectible items is:

When the two entries above, for estimated depreciation and bad debts, are posted, the present appraised values of those particular assets are brought on the ledger; i.e., from the values, as shown by the respective asset accounts, are taken the portions estimated to have been used up, lost through depreciation, or uncollectible. These lost portions are set up as expense items, leaving in the adjusted asset accounts true asset values as existing at the close of the period.

Accrued Income.—As to the asset portion of items of this kind, it is indicated in the account in a manner similar to deferred expenses, as explained on [page 242]. Take the case of interest income earned but not due. The entry for adjusting it is: