Closing Entries Updates Inventory
If closing entries are used to update inventory, no adjusting entries affect the inventory account, so the beginning inventory balance appears in the work sheet's trial balance and adjusted trial balance columns. This beginning inventory balance is first extended to the income statement debit column. Then, the value of inventory at the end of the accounting period is placed in the work sheet's income statement credit column and balance sheet debit column.
The entries in the work sheet's income statement columns are used in the calculation of cost of goods sold on the income statement, and the entry in the work sheet's balance sheet debit column provides the correct balance for merchandise inventory on the balance sheet.