Recording Inventory Transactions

Recording Inventory Transactions

1. Two methods of recording inventory transactions
(1) Perpetual inventory system
(2) Periodic inventory system

2. Perpetual inventory system
--> records purchases to inventory account
--> each time transaction occurs
--> inventory account is updated continuously during the period

3. Periodic inventory system
--> records purchases to purchases account
--> inventory account is updated only at the end of the period
--> based on the results of physical inventory taking

[Example 1]

January 1, 2011
Entity A had 400 units of merchandise in inventory at $10 per unit cost

5. January 10, 2011
Entity A purchased 500 units of merchandise at $10 per unit price on credit

Journal entry for perpetual inventory system

debit credit Merchandise inventory 5,000         Accounts payable   5,000 Journal entry for periodic inventory system

debit credit Purchases 5,000         Accounts payable   5,000 6. January 20, 2011 Entity A purchased 600 units of merchandise at $10 per unit price on credit Journal entry for perpetual inventory system

debit credit Merchandise inventory 6,000         Accounts payable   6,000 Journal entry for periodic inventory system

debit credit Purchases 6,000         Accounts payable   6,000 7. January 25, 2011 Entity A sold 700 units of merchandise at $15 per unit price on credit Journal entry for perpetual inventory system To record sale s revenue

debit credit Accounts receivable 10,500         Sales   10,500 To record cost of goods sold

debit credit Cost of goods sold 7,000         Merchandise inventory   7,000 Journal entry for periodic inventory system To record sale s revenue

debit credit Accounts receivable 10,500         Sales   10,500 No journal entry is prepared to record cost of goods sold during the period --> cost of goods sold is recorded only at the end of the period 8. January 31, 2011 Entity A took physical inventory and counted 800 units of merchandise inventory Journal entry for perpetual inventory system --> no journal entry is prepared --> inventory and cost of goods sold accounts are updated --> continuously during the period Journal entry for periodic inventory system Beginning inventory = 400 units x $10 = $4,000 Purchases = 500 unit x $10 + 600 units x $10 = $11,000 Cost of goods sold = 700 units x $10 =$7,000 Ending inventory = 800 units x $10 = $8,000 Beginning inventory and purchases are redistributed --> to cost of goods sold and ending inventory

	debit	credit
Cost of goods sold	7,000
Merchandise inventory	8,000
Merchandise inventory		4,000
Purchases		11,000

9. Gross profit is same for both methods of inventory recording
Sales revenue - Cost of goods sold
= $10,500 - $7,000 = $3,500