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Comprehensive Review of Inventory Systems in the Accounting Cycle

Understand the processes and entries involved in both perpetual and periodic inventory systems within the accounting cycle, from transactions to financial statement preparation. Review journal entries, trial balances, and system-specific procedures.

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Comprehensive Review of Inventory Systems in the Accounting Cycle

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  1. Inventory Systems Review of Inventory Systems Perpetual Inventory System Periodic Inventory System

  2. Accounting Cycle (Page 1 of 3) • Transactions occur • Documents are created • Journalize the documents • Post from journals to general ledger (GL) and/or subsidiary ledgers • Prepare working trial balance-unadjusted trial balance from general ledger

  3. Accounting Cycle (Page 2 of 3) • Develop adjusting journal entries (AJEs) • Enter AJEs on working trial balance • Extend working trial balance to derive adjusted trial balance • Complete working trial balance • Income statement columns • Balance sheet columns • Prepare financial statements

  4. Accounting Cycle (Page 3 of 3) • Journalize AJEs in general journal • Post AJEs from general journal to ledgers • Journalize closing journal entries (CJEs) in general journal • Post CJEs from general journal to ledgers • Prepare post-closing trial balance

  5. Inventory Systems • Perpetual Inventory System • Balance sheet balance is always correct • Cost of goods sold account in GL • Periodic Inventory System • Balance sheet reflects beginning inventory • Multiple purchase related accounts in the GL

  6. Perpetual Inventory System Journal Entries (Page 1 of 3) • Purchases of inventory are recorded in the merchandise inventory account (ASSET) • Transportation costs on merchandise purchased are recorded in the merchandise inventory account

  7. Perpetual Inventory System Journal Entries (Page 2 of 3) • All returns of inventory and reductions in purchase price due to discounts are recorded as deductions to the merchandise inventory account • Whenever a sale is made, TWO JOURNAL ENTRIES are needed. • To record the Sale • To record Cost of Merchandise Sold

  8. Perpetual Inventory System Journal Entries (Page 3 of 3) • Whenever a customer returns merchandise, TWO JOURNAL ENTRIES must be made • To record Sales Returns and Allowances • To record reduce Cost of Merchandise Sold

  9. Income Statement • Revenue from Sales: • Sales • Less: Sales Returns & Allowances • Less: Sales Discounts • Net Sales • Cost of Merchandise Sold • Gross Profit

  10. Periodic Inventory SystemJournal Entries (Page 1 of 3) • The Merchandise Inventory Account reflects the beginning balance all year • Purchases of merchandise inventory are debited to the Purchases account • Sales of merchandise inventory are recorded with ONE JOURNAL ENTRY • To record the sale of merchandise • No entry to record the cost of merchandise sold

  11. Periodic Inventory SystemJournal Entries (Page 2 of 3) • The Merchandise Inventory account in the GL is beginning inventory all year • There is no Cost of Merchandise Sold • Merchandise general ledger accounts: • Purchases • Purchase returns and allowances • Purchase discounts • Transportation in

  12. Periodic Inventory SystemJournal Entries (Page 3 of 3) • At year end • Inventory is counted • Merchandise Inventory account is: • credited to remove old balance • debited to record new balance • The off setting entries are posted to Income Summary account • Multi-Step Income Statement

  13. Income Statement • Revenue from Sales: • Sales • Less: Sales Returns & Allowances • Less: Sales Discounts • Net Sales • Cost of Merchandise Sold* • Gross Profit • * For Periodic Inventory System see next slide

  14. Income Statement:Cost of Merchandise SoldPeriodic Inventory System • Cost of Merchandise Sold: • Beginning Merchandise Inventory • Plus: Cost of Merchandise Purchased: • Purchases • Less: Purchase Returns & Allowances • Less: Purchase Discounts • Net Purchases • Plus Transportation In • Cost of Merchandise Purchased • Merchandise Available for Sale • Less: Ending Merchandise Inventory • COST OF MERCHANDISE SOLD

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