{"id":85,"date":"2015-01-18T23:13:41","date_gmt":"2015-01-18T23:13:41","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=85"},"modified":"2017-08-22T19:37:02","modified_gmt":"2017-08-22T19:37:02","slug":"journal-entries-for-inventory-purchases-and-sales","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/journal-entries-for-inventory-purchases-and-sales\/","title":{"raw":"Buyer Entries under Perpetual Method","rendered":"Buyer Entries under Perpetual Method"},"content":{"raw":"

The following video summarizes how to journalize purchases under the perpetual inventory system.<\/p>\r\nhttps:\/\/youtu.be\/3j-CG84f988?list=PL_PmoCeUoNMIX3zP2yYSAq8gi6irBVh-1\r\n

Under the perpetual inventory system, remember we want to constantly update the inventory balance to match what we paid for the inventory and for what we have on hand.\u00a0\u00a0We will be using ONLY 3 accounts for any journal entries as the buyer<\/strong>:<\/p>\r\n\r\n

    \r\n \t
  1. Cash<\/li>\r\n \t
  2. Merchandise Inventory (or Inventory)<\/li>\r\n \t
  3. Accounts Payable<\/li>\r\n<\/ol>\r\nCash and Merchandise Inventory accounts are current assets with normal debit balances (debit to increase and credit to decrease).\u00a0 Accounts payable is a current liability with a normal credit balance (credit to increase and debit to decrease).\u00a0 Whenever we are the buyer, use a combination of these 3 accounts only.<\/strong>\r\n

    Inventory Purchases<\/h3>\r\n

    To illustrate the perpetual inventory\u00a0method journal entries, assume that Hanlon Food Store made two purchases of merchandise from Smith\u00a0Company.<\/p>\r\n\r\n

      \r\n \t
    • On May 4, Hanlon purchased $30,000 of merchandise with credit terms of 2\/10, n30 and shipping terms\u00a0FOB Destination.<\/li>\r\n \t
    • on May 21, Hanlon\u00a0purchased\u00a0$20,000 of merchandise for cash with shipping terms FOB Shipping Point.<\/li>\r\n<\/ul>\r\nThe required journal entries for Hanlon are:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      May 4<\/td>\r\nMerchandise Inventory<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Accounts Payable<\/td>\r\n<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record the purchase of inventory on account.<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      May 21<\/td>\r\nMerchandise Inventory<\/td>\r\n\u00a0 20,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n\u00a0 20,000<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record the purchase of inventory with cash.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      On May 4, we realize credit terms means we have not paid for it yet but will pay for it later (accounts payable)\u00a0 We are offered a 2%\u00a0discount but do not record it yet as we do not know if we will make the discount due date.\u00a0 On May 21, we paid with cash so we do not have credit terms since it has been paid.<\/span><\/p>\r\n\r\n

      \u00a0Shipping on Inventory Purchases<\/h3>\r\nWe learned shipping terms tells you who is responsible for paying for shipping.\u00a0 FOB Destination means the seller is responsible for paying shipping and the buyer would not need to pay or record anything for shipping.\u00a0 FOB Shipping Point means the buyer is responsible for shipping and must pay and record for shipping.\r\n\r\nIn our example for Hanlon, May 4 was FOB Destination and we will not have to do anything for shipping.\u00a0 On May 21, shipping terms were FOB Shipping Point meaning we, as the buyer, must pay for shipping.\u00a0 Under the perpetual inventory system, remember we only use 3 accounts:\u00a0 Cash, Inventory and Accounts Payable. We want to constantly update the inventory balance to match what we actually paid.\u00a0 We will debit Inventory for the shipping cost and credit cash or accounts payable depending on if we paid it now or later.\u00a0 Let's continue with another example from Hanlon.\r\n\r\nOn\u00a0May 22 Hanlon paid We Ship It $200 for shipping on the items purchased May 21.\u00a0The journal entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/td>\r\nAccount<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
      May 22<\/td>\r\nMerchandise Inventory<\/td>\r\n200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n200<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record the payment of shipping charges.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      Purchase returns and allowances<\/b> <\/span><\/h3>\r\n

      A purchase return<\/strong> occurs when a buyer returns merchandise to a seller.\u00a0<\/span>When a buyer receives a reduction in the price of goods shipped but does not return the merchandise<\/em>, a purchase allowance<\/strong> results. <\/span><\/p>\r\n

      Regardless of\u00a0whether we have\u00a0return or allowance, the process is exactly<\/strong> the same under the perpetual inventory system.\u00a0 Both returns and allowances reduce the buyer's debt to the seller (accounts payable) and decrease the cost of the goods purchased (inventory). We will debit Accounts Payable and credit Merchandise Inventory.<\/span><\/p>\r\n

      If Hanlon returned $350 of merchandise to Smith Wholesale on May 6\u00a0before paying for the goods,\u00a0Hanlon would make this journal entry:<\/span><\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/td>\r\nAccount<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
      May 6<\/td>\r\nAccounts Payable<\/td>\r\n\u00a0 350<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Merchandise Inventory<\/td>\r\n<\/td>\r\n\u00a0 350<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record return of merchandise.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      The entry would have been the same to record a $ 350 allowance. Only the explanation would change.<\/span><\/p>\r\n

      If Hanlon had already paid the account, the debit would be to Cash instead of Accounts Payable, since Hanlon would receive a refund of cash. If the company took a discount at the time it paid the account, only the net amount would be refunded. For instance, if a 2% discount had been taken, the return amount would be $350 - (350 x 2%) or $343.\u00a0 Hanlon's journal entry for the return would be:<\/span><\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/td>\r\nAccount<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
      May 6<\/td>\r\nCash<\/td>\r\n\u00a0 343<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Merchandise Inventory<\/td>\r\n<\/td>\r\n\u00a0 343<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record return of merchandise for a refund\u00a0less the 2% discount.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      Paying for Inventory Purchased on Credit<\/span><\/h3>\r\n

      When paying for inventory purchased on credit, we will decrease what we owe to the seller (accounts payable) and cash.\u00a0 If we take a discount for paying early, we record this discount in the merchandise inventory account since it will reduce what we paid for inventory.<\/p>\r\n

      Using the purchase transaction from May 4 and no returns, Hanlon pays the amount owed on May 10.\u00a0 May 10 is within the discount period and Hanlon will take the 2% discount provided in the terms 2\/10, n30 (remember, this means 2% discount if paid in 10 days of the invoice date otherwise, full amount is due in 30 days).<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/td>\r\nAccount<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
      May 10<\/td>\r\nAccounts Payable<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Merchandise Inventory (30,000 x 2%)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0 600<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Cash (30,000 - 600)<\/td>\r\n<\/td>\r\n\u00a0 29,400<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record payment for merchandise less the 2% discount.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      We reduce the full amount owed on May 4 and calculate the 2% discount based on this amount.\u00a0 The cash amount is the amount we owe - discount.<\/p>\r\n

      Assume we also had the return on May 6 of $350.\u00a0 Hanlon pays the amount owed less the return and takes the 2% discount on May 12.\u00a0 The journal entry for this payment would be:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/td>\r\nAccount<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
      May 12<\/td>\r\nAccounts Payable (30,000 - 350)<\/td>\r\n29,650<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Merchandise Inventory (29,650 x 2%)<\/td>\r\n<\/td>\r\n593<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Cash (29,650 - 593)<\/td>\r\n<\/td>\r\n29,057<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record\u00a0payment for merchandise less the 2% discount and a $350 return.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      We reduce the full amount owed on May 4 less the return of $250.\u00a0 The discount is calculated based on the amount owed\u00a0less the return x 2%.\u00a0 The cash amount is the amount we owe - the return - the discount.<\/p>\r\n

      Finally, if instead Hanlon did not have any returns and did not pay the invoice within the discount period but paid the invoice from May 4 on May 30.\u00a0 The entry would be:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Date<\/td>\r\nAccount<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
      May 30<\/td>\r\nAccounts Payable<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      <\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/tr>\r\n
      <\/td>\r\nTo record payment of merchandise.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

      \u00a0Summary<\/span><\/h3>\r\nUnder the perpetual inventory method, purchase entries will use a combination of these 3 accounts only:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Name<\/strong><\/td>\r\nAccount Type<\/strong><\/td>\r\n<\/tr>\r\n
      Cash<\/td>\r\nCurrent asseet<\/td>\r\n<\/tr>\r\n
      Inventory<\/td>\r\nCurrent asseet<\/td>\r\n<\/tr>\r\n
      Accounts Payable<\/td>\r\nCurrent liability<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>","rendered":"

      The following video summarizes how to journalize purchases under the perpetual inventory system.<\/p>\n