Lecture

6
Accounting for Inventory (I) - Inventory System

Operating Cycle of a Merchandising Company

Cash

Accounts A t Receivable

Inventory
2. Sale of merchandise on account
by Vincent Chen

Income Statement
Campbell p Condensed Income Statement For the Year Ended December 31, 2008 Revenue from sales $ 900,000 Less: Cost of goods sold 540,000 Gross profit $ 360,000 Less: Expenses 270,000 N i Net income $ 90,000 90 000

Cost of goods sold represents the expense of goods that are sold to customers.

Gross profit G fit is i a useful f l means of f measuring i the profitability of sales transactions.

Inventory Management System

Two Approaches Used in Accounting for Merchandise Inventories

Perpetual P t l Inventory System

Periodic P i di Inventory System

by Vincent Chen

Perpetual Inventory System

The inventory account is continuously updated to reflect items on hand.

Let s look Lets at some entries!

by Vincent Chen

Perpetual Inventory System

On September 5 5, Wii Corp purchased 100 laser lights for resale for $30 per unit from Echo on account account.
GENERAL JOURNAL
Date Account Titles and Explanation Accounts Payable (Echo) Debit 3,000 3,000 Credit

Sept. 5 Inventory

Perpetual Inventory System

On September 10, Wii Corp sold 10 laser lights for $50 per unit on account to Apple Radios.
GENERAL JOURNAL
Date

10 $30 = $300
Debit

Retail
Credit 500 300

Account Titles and Explanation Sales

p 10 Accounts Receivable ( (Apple pp Radios) ) Sept.

500

10 Cost of Goods Sold Inventory

Cost

300

Perpetual Inventory System

On September 15 15, Wii Corp paid Echo $3 $3,000 000 for the September 5 purchase.

GENERAL JOURNAL
Date Account Titles and Explanation Cash Debit 3,000 3,000 Credit

Sept. 15 Accounts Payable (Echo)

Perpetual Inventory System

On September p 22, Wii Corp p received $500 from Apple Radios as payment in full for purchase on September p 10. their p

GENERAL JOURNAL
Date Account Titles and Explanation Accounts Receivable (Apple Radios) Debit 500 500 Credit

Sept. 22 Cash

Taking a Physical Inventory

In order to ensure the accuracy of th i perpetual their t l records, d most t businesses take a complete physical h i l count t of f the th merchandise h di on hand at least once a year.

by Vincent Chen

Taking a Physical Inventory

Reasonable amounts of inventory shrinkage are viewed as a normal cost of doing business. Examples include breakage, spoilage and theft.

On December O D b 31, 31 Wii Corp C counts t it its inventory. i t An inventory shortage of $2,000 is discovered.
GENERAL JOURNAL
Date Account Titles and Explanation I Inventory t Debit 2,000 2 000 2,000 Credit

Dec. 31 Cost of Goods Sold

P i di I Periodic Inventory t S System t

No effort is made to keep p up-to-date p records of either inventory or cost of goods sold. g

by Vincent Chen

S l ti an I Selecting Inventory t System S t

Factors Suggesting a Factors Suggesting a Periodic Perpetual Inventory System Inventory System
Large company with professional Small company, run by owner. management. Items in inventory with a high per- Inventory with many different kinds of unit cost. low-cost items. Low volume of sales transactions High volume of sales transactions or a computerized accounting and a manual accounting system. system system.

P Purchasing h i Products P d t

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T Transportation t ti Costs C t on Purchases P h Transportation costs related to the acquisition of assets are part of the cost of the asset being g acquired. q

by Vincent Chen

Credit Terms and Cash Discounts

When manufacturers and wholesalers sell their products on account, account the credit terms are stated in the invoice.

2/10 n/30 2/10, /30

Recording Purchases at Gross Invoice Pi Price

Purchases are recorded at their gross amounts. g

Gross Method

Purchase di discounts taken k are recorded when payment is made inside the discount period. by Vincent Chen

Recording Purchases at Gross Invoice Pi Price

On July 6 6, PapaJohns purchased $4 $4,000 000 of merchandise on credit with terms of 2/10 n/30 from Kmart 2/10, Kmart. Prepare the journal entry for PapaJohns.
GENERAL JOURNAL
Date Account Titles and Explanation Accounts Payable (Kmart) Debit 4,000 4,000 Credit

July 6 Inventory

Recording Purchases at Gross Invoice Price On July y 15, PapaJohns p p pays y the full amount due to Kmart. Prepare the journal entry for PapaJohns.
Reduces Cost of $4,000 98% = $3,920 GENERAL JOURNAL Goods Sold
Date Account Titles and Explanation Cash Purchase Discounts Taken Debit 4,000 3 920 3,920 80 Credit

July 15 Accounts Payable (Kmart)

Recording Purchases at Gross Invoice Price Now, assume that PapaJohns waited until July 20 to pay the full amount due to Kmart. Prepare the journal entry for PapaJohns.

GENERAL JOURNAL
Date Account Titles and Explanation Cash Debit 4,000 4 000 4,000 Credit

July 20 Accounts Payable (Kmart)

S lli Selling Products P d t

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Goods In Transit
A sale should be recorded when title to the merchandise passes to the buyer.
F.O.B. shipping hi i point title passes to buyer at the point of shipment. F.O.B. d i destination i point title passes to buyer at the point of destination.

Year End

Transactions Relating to Sales

Campbell p Partial Income Statement For the Year Ended December 31, 2008 Revenue Sales Less: Sales returns and allowances $ Sales discounts Net sales $ 912,000 8,000 4,000 12,000 $ 900,000

Credit terms and merchandise returns affect the amount of revenue earned by the seller.

Sales Return and Allowances

On August 2, Kmart sold $2,000 of merchandise to PapaJohns on credit terms 2/10 2/10, n/30. n/30 Kmart originally paid $1,000 for the merchandise. Because Kmart uses a p perpetual p inventory y system, y , they y must make two entries.

GENERAL JOURNAL
Date Account Titles and Explanation Sales Debit 2,000 2 000 2,000 Credit

Aug. 2 Accounts Receivable (PapaJohns)

Sales Return and Allowances

On August 2, Kmart sold $2,000 of merchandise to PapaJohns on credit terms 2/10 2/10, n/30. n/30 Kmart originally paid $1,000 for the merchandise. Because Kmart uses a p perpetual p inventory y system, y , they y must make two entries.

GENERAL JOURNAL
Date Account Titles and Explanation Inventory Debit 1,000 1 000 1,000 Credit

Aug. 2 Cost of Goods Sold

Sales Returns and Allowances

On August 5, PapaJohns returned $500 of unsatisfactory merchandise to Kmart from the August 2 sale. Kmarts cost for this merchandise was $250. Because Kmart uses a perpetual inventory system system, they must make two entries.
GENERAL JOURNAL
Date Account Titles and Explanation Accounts Receivable (PapaJohns)

Contra-revenue
Debit 500 500 Credit

Aug. 5 Sales Returns and Allowances

Sales Returns and Allowances

On August 5, PapaJohns returned $500 of unsatisfactory merchandise to Kmart from the August 2 sale. Kmarts cost for this merchandise was $250. Because Kmart uses a perpetual inventory system system, they must make two entries.
GENERAL JOURNAL
Date Account Titles and Explanation Cost of Goods Sold Debit 250 250 Credit

Aug. 5 Inventory

Sales Discounts
On July 6, Kmart sold $4,000 of merchandise to PapaJohns on credit with ith terms of 2/10 2/10, n/30 n/30. The merchandise originally cost Kmart $2,000. Because Kmart uses a p perpetual p inventory y system, y , they y must make two entries.

GENERAL JOURNAL
Date Account Titles and Explanation Sales Debit 4,000 4 000 4,000 Credit

July 6 Accounts Receivable (PapaJohns)

Sales Discounts
On July 6, Kmart sold $4,000 of merchandise to PapaJohns on credit with ith terms of 2/10 2/10, n/30 n/30. The merchandise originally cost Kmart $2,000. Because Kmart uses a p perpetual p inventory y system, y , they y must make two entries.

GENERAL JOURNAL
Date Account Titles and Explanation Inventory Debit 2,000 2 000 2,000 Credit

July 6 Cost of Goods Sold

Sales Discounts
On July y 15, Kmart receives the full amount due from PapaJohns from the y 6 sale. July Prepare the journal entry for Kmart.
Contra-revenue
Date

GENERAL JOURNAL

$4,000 98% = $3,920

Debit 3,920 80 4,000 Credit

Account Titles and Explanation Sales Discounts Accounts Receivable (Papajohns)

July 15 Cash

Sales Discounts
Now, assume that it wasnt until July y 20 that Kmart received the full amount due from p from the July y 6 sale. PapaJohns Prepare the journal entry for Kmart.
GENERAL JOURNAL
Date Account Titles and Explanation Accounts Receivable (PapaJohns) Debit 4,000 4 000 4,000 Credit

July 20 Cash

Summary
Perpetual/periodic inventory systems Accounting for purchase discount discount, sales discount, sales return and sales allowance

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