accounting: closing entries, merchandising?

Question

why do you debit income summary and credit merchandise inventory beginning and you close merchandise inventory end by debiting merchandise inventory end and crediting income summary?

ok im confused at my first question. Why do you close merchandise beginning by that way? debiting income summary means that your capital will get decreased. So why is merchandise inventory beginning treated as that? why does it decrease you capital when its an asset right?

Answer 1

Well, at least you know that debiting income summary has the effect of a cost or expense, that's why capital will decrease, agreed? Beginning inventory should by the end of the year have been sold. So beginning inventory should end up as cost of goods sold, right? To give it that effect, it should be debited to income summary. So:
Dr Income summary
Cr Beginning inventory

But you would also have debited income summary with the total of your purchases. That would have been ok if you've sold ALL your inventory, but that is not the case. You have ending inventory, i.e. not everything was sold. If you don't recognise this, you'd have over-debited your income summary with too much costs (beginning inventory plus purchases). So what do you do to correct this? You take OUT the ending inventory amt. from your income summary. You:
Dr Ending inventory
Cr Income summary

thereby leaving the income summary with just the correct amt of COGS. Hope I didn't confuse you more:-)

Answer 2

Hahaha! I was as confused as you were during my freshmen years. Just do it and prepare the income statement and balance sheet, and you'll understand why.