Perpetual Inventory System: Features, Transactions, and Terms

1. Chapter Five Accounting for Merchandising Businesses

2. Sale Merchandising Businesses Merchandising businesses generate revenue by selling goods. The goods purchased for resale are called merchandise inventory.

3. Identify and explain the primary features of the perpetual inventory system. LO 1

4. Product Costs Selling & Admin. Costs Costs that are included in inventory. Costs that are not included in inventory. They are sometimes called period costs. Product Costs Versus Selling and Administrative Costs

5. Merchandise Inventory (Balance Sheet) Cost of Goods Available for Sale Cost of Goods Sold (Income Statement) Allocation of Inventory Cost Between Asset and Expense Accounts

6. Gross Margin (or Gross Profit)

7. Gross Profit – Op Exp. = Op. Income Op. Inc + Other Inc. – Exp = Inc. Before taxes Inc. before taxes – taxes = Net Income

9. Perpetual Inventory System Inventory account is adjusted perpetually (continually) throughout the accounting period. Perpetual Inventory System

10. Record and report inventory transactions in the double-entry accounting system. LO 2

11. Perpetual Inventory System Let’s see how a perpetual inventory system works by looking at transactions for June’s Plant Shop (JPS).

12. Increase assets (cash). • Increase equity (common stock). Asset Source Transaction Event 1: JPS acquired $15,000 by issuing common stock.

13. Journal Entry Cash $15,000 Common Stock $15,000

14. Asset Exchange Transaction • Decrease assets (cash). • Increase assets (merchandise inventory). Event 2: JPS purchased merchandise inventory for $14,000 cash.

15. Journal Entry Inventory $14,000 Cash $14,000

16. Asset Source Transaction • Increase assets (cash). • Increase equity (sales revenue). Event 3a: JPS recognized sales revenue from selling inventory for $12,000.

17. Journal Entry Cash $12,000 Sales $12,000

18. Decrease assets (merchandise inventory). • Decrease equity (cost of goods sold). Asset Use Transaction Event 3b: JPS recognized $8,000 of cost of goods sold.

19. Journal Entry Cost of Goods Sold $8,000 Inventory $8,000

20. Asset Use Transaction • Decrease assets (cash). • Decrease equity (selling expenses). Event 4: JPS paid $1,000 cash for selling expenses.

21. Journal Entry Selling Expense $1,000 Cash $1,000

22. Asset Exchange Transaction • Decrease assets (cash). • Increase assets (land). Event 5: JPS paid $5,500 cash to purchase land for a place to locate a future store.

23. Journal Entry Land $5,500 Cash $5,500

26. Explain the meaning of terms used to describe transportation costs, cash discounts, returns or allowances, and financing costs. LO 3

27. Other Topics • Purchasing inventory often involves: • Transportation costs • Inventory returns • Purchase allowances • Cash discounts Let’s look at these transactions for JPS.

28. Asset Source Transaction • Increase assets (cash). • Increase liabilities (notes payable). Event 1: JPS borrowed $4,000 cash by issuing a note payable.

29. Journal Entry Cash $4,000 Note Payable $4,000

30. Increase assets (merchandise inventory). • Increase liabilities (accounts payable). Asset Source Transaction Event 2: JPS purchased on account merchandise inventory with a list price of $11,000.

31. Journal Entry Inventory $11,000 Accounts Payable $11,000

32. Decrease assets (merchandise inventory). • Decrease liabilities (accounts payable). Asset Use Transaction Event 3: JPS returned some of the inventory purchased in Event 2. The list price of the returned merchandise was $1,000.

33. Journal Entry Accounts Payable $1,000 Inventory $1,000

34. Event 4: JPS received a cash discount on goods purchased in Event 2. The credit terms are 2/10 n/30. Before analyzing this transaction, let’s learn a little about cash discounts.

35. Terms Time Due Discount Period Credit Period Full amount less discount Full amount due Purchase or Sale Cash Discounts A deduction from the invoice price granted to induce early payment of the amount due.

36. Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due

37. Decrease assets (merchandise inventory). • Decrease liabilities (accounts payable). Asset Use Transaction Event 4: JPS received a cash discount on goods purchased in Event 2. The credit terms were 2/10, n/30.

38. Journal Entry Accounts Payable $200 Inventory $200

39. Decrease assets (merchandise inventory). • Decrease liabilities (accounts payable). Asset Use Transaction Event 5: JPS paid the $9,800 balance due on the account payable.

40. Journal Entry Accounts Payable $9,800 Cash $9,800

41. Event 6: The shipping terms for the inventory purchased in Event 2 were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise. Before analyzing this transaction, let’s learn a little about transportation costs.

42. Buyer Seller Merchandise FOB shipping point (buyer pays) FOB destination (seller pays) Transportation Costs FOB = Free on Board

43. Asset Exchange Transaction • Decrease assets (cash). • Increase assets (merchandise inventory). Event 6: The shipping terms for the inventory purchased in Event 1 were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise.

44. Journal Entry Inventory $300 Cash $300

45. Asset Source Transaction • Increase assets (cash). • Increase equity (sales revenue). Event 7a: JPS recognized $24,750 of revenue on the cash sale of merchandise that cost $11,500.

46. Journal Entry Cash $24,750 Sales $24,750 Cost of Goods Sold $11,500 Inventory $11,500

47. Decrease assets (merchandise inventory). • Decrease equity (cost of goods sold). Asset Use Transaction Event 7b: JPS recognized $11,500 of cost of goods sold.

48. Asset Use Transaction • Decrease assets (cash). • Decrease equity (transportation-out). Event 8: JPS paid $450 cash for freight costs on inventory delivered to customers.

49. Journal Entry Transportation Out $450 Cash $450

50. Asset Use Transaction • Decrease assets (cash). • Decrease equity (transportation-out). Event 8: JPS paid $450 cash for freight costs on inventory delivered to customers.