Journal Entries for the Perpetual Inventory Method As suggested above, the Perpetual method makes use of the Inventory account when Inventory is purchased sold. Here is a summary of the typical journal entries: . !hen inventory inventory is is purchased, purchased, a debit debit is made to to the Inventory Inventory account account and a credit credit made made to "ash or Accounts Payable. Inventory is a current asset. #$ample: %ones purchases &',((( of Inventory Inven tory on account, with terms of )*(, n*+(. he journal entry would be:
). If merchandise merchandise is return returned ed to a supplier, supplier, a debit is made made to Accounts Accounts Payable Payable or "ash, "ash, and a credit is made to the Inventory account. #$ample: %ones returns &'(( of goods to the supplier because they were defective. he entry is:
+. !hen a sale sale of merchandis merchandisee occurs, there there are two two entries. entries. he first first entry entry is a debit debit to Accounts -eceivable and a credit to ales. he second entry is a debit to "ost of /oods old and a credit to the Inventory account. he "ost of /oods old old is considered a type of e$pense account, and this second entry transfers the inventory cost out of the asset section and into "ost of /oods old. -emember that the selling amount should be higher than the cost of the goods, since we are in business to make a profit. #$ample: %ones sells &,((( of Inventory for a price of &,+((, on account, with terms of )*(, n*+(:
0. 1epending upon prevailing interest rates, merchandisers may offer a discount if their customer pays early. uch discounts are e$pressed something like this: 2)*(, n*+(2, which means that if the customer pays within ( days, the customer can deduct )3 of the amount of their invoice. uppose %ones pays off the supplier for the inventory purchased in transaction above. 4eep in mind that he originally purchased &',((( of inventory, but that he immediately returned &'(( to the supplier. He currently owes &0'((. If he pays within ( days, he can deduct )3 of the invoice amount. wo percent of &0'(( is &5(, and he can satisfy the invoice by paying &00(. Here is the journal entry:
6otice that, by paying early, we can reduce the cost of inventory by &5(. '. imilarly, we can offer terms to our customers. 7ooking back at transaction +, if %ones offers terms of )*(, n*+( on a sale of &+((, the customer can deduct &)8, and %ones will receive a check for &)90 to satisfy the bill:
8. If freight charges are paid on incoming merchandise, such charges are just added to the inventory cost. or e$ample, if freight of &;( is paid for delivery of inventory to us, the entry is:
reight charges are considered an additional cost of inventory from the buyerut?. 9. If a customer returns goods to us, such goods are considered a ales -eturn. or e$ample, if a customer returns goods for which &(( was paid, the following entry would be made:
6ote: if the goods that are returned to us are unsaleable due to damage or malfunction, no further entry is necessary. However, if the returned items can be resold, they must be put back in the Inventory account =at our cost?, as follows:
@ou might think of this situation as an 2unsale2 of the goods both the ale is reversed =by the debit to ales -eturns and Allowances? and the cost of the sold inventory is moved from "ost of /oods old back into the Inventory account. A convenient summary of these merchandising transactions appears on page 50 in Illustration 'B'.
The Merchandising Income Statement As mentioned earlier, the Cerchandising Income tatement is illustrated on page 5; in Illustration 'B. he general format of this statement is as follows:
his is the format for a multiple step income statement. here are two main calculations =the steps?, as follows: . 6et ales B "ost of /oods old D /ross Profit ). /ross Profit B #$penses D 6et Income or simplicity, Ither -evenues and /ains, and the >ther #$penses and 7osses. @our te$t also illustrates a single step income statement, in which "ost of /oods old is simply presented as an ordinary e$pense. his form of statement appears on page 55 in Illustration 'B ).
Closing Entries for Merchandising /oing back to the Baccounts for the Perpetual Inventory method, the closing entries would be journaliEed as follows: ales
FFF Income ummary
Income ummary
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FFF ales 1iscounts ales -et. G All. "ost of /oods old All #$penses...
Income ummary
FFF FFF FFF FFF
FFF "apital
"apital
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FFF 1rawing
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