{"id":89,"date":"2015-03-18T23:15:24","date_gmt":"2015-03-18T23:15:24","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=89"},"modified":"2017-08-22T19:45:40","modified_gmt":"2017-08-22T19:45:40","slug":"the-periodic-and-perpetual-inventory-methods","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/the-periodic-and-perpetual-inventory-methods\/","title":{"raw":"Buyer Entries under Periodic Inventory System","rendered":"Buyer Entries under Periodic Inventory System"},"content":{"raw":"Under periodic inventory procedure,<\/b> the Merchandise Inventory account is updated periodically after a physical count has been made<\/strong>. Usually, the physical count takes place immediately before the preparation of financial statements. This method is most effective for a\u00a0company with a small amount of inventory due to the labor required to do a physical count of inventory.\u00a0 Companies using periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Thus, these companies have no up-to-date balance against which to compare the physical inventory count at the end of the period. <\/span>\r\n

The following video covers how to journalize purchases under the periodic inventory system.<\/p>\r\nhttps:\/\/youtu.be\/e_rYpYWGPYU\r\n

Since a company does not use the Merchandise inventory account during the accounting period, what accounts do they use for merchandise purchases?\u00a0 Here is a list of the accounts needed under a periodic inventory system:<\/span><\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Name<\/strong><\/td>\r\nIncreases<\/strong><\/td>\r\nDecreases<\/strong><\/td>\r\n<\/tr>\r\n
Purchases<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Purchases Returns and allowances<\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\n<\/tr>\r\n
Purchase Discounts<\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\n<\/tr>\r\n
Transportation (or Freight) In<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Cash<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Accounts Payable<\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

Inventory Purchases under Periodic<\/b><\/span><\/h3>\r\n

Companies using periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Under periodic inventory procedure, a merchandising company uses the Purchases account<\/b> to record the cost of merchandise bought for resale during the current accounting period. The Purchases account, which is increased by debits, appears with the income statement accounts in the chart of accounts.<\/span><\/p>\r\n

To illustrate the periodic 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:\u00a0<\/span>\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\nPurchases<\/td>\r\n30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Accounts Payable<\/td>\r\n<\/td>\r\n30,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record purchase of merchandise on credit.<\/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\nPurchases<\/td>\r\n20,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record purchase of merchandise with cash.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nOn May 4, we\u00a0know 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 if we pay within 10 days 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.\r\n

    Shipping on Inventory Purchases<\/strong><\/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\nBuyers must record\u00a0shipping charges as transportation in<\/strong> (or Freight In) \u00a0when the goods were shipped FOB shipping point and they have received title to the merchandise.\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\u00a0periodic inventory system,\u00a0we will debit Transportation (or freight) In 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<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    May 22<\/td>\r\nTransportation In<\/td>\r\n200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n200<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record payment of shipping charges.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Purchase returns and allowances <\/strong><\/h3>\r\nA purchase return<\/strong> occurs when a buyer returns merchandise to a seller.\u00a0When a buyer receives a reduction in the price of goods shipped but does not return the merchandise<\/em>, a purchase allowance<\/strong> results.\r\n\r\nRegardless of\u00a0whether we have\u00a0return or allowance, the process is exactly<\/strong> the same under the periodic 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 (purchases). The buyer may want to know the amount of returns and allowances as the first step in controlling the costs incurred in returning unsatisfactory merchandise or negotiating purchase allowances. For this reason, buyers record purchase returns and allowances in a separate Purchase Returns and Allowances account.<\/b>\r\n\r\nIf Hanlon returned $350 of merchandise to Smith Wholesale on May 6\u00a0before paying for the goods,\u00a0Hanlon would make this journal entry:\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 6<\/td>\r\nAccounts Payable<\/td>\r\n350<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Purchase returns and allowances<\/td>\r\n<\/td>\r\n350<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record return of merchandise for credit.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe entry would have been the same to record a $ 350 allowance. Only the explanation would change.\r\n\r\nIf 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 Discounts are recorded in a separate purchase discounts account.\u00a0 <\/strong>Hanlon's journal entry for the return would be:\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 6<\/td>\r\nCash<\/td>\r\n343<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nPurchase Discounts<\/td>\r\n7<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Purchase returns and allowances<\/td>\r\n<\/td>\r\n350<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record return of merchandise for refund after 2% discount.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Notice a 2% discount is taken on the return since we already paid and received the 2% discount.\u00a0 We reduce the amount of the discount (originally recorded as a credit) since we can no longer claim that as a discount since the merchandise was returned.<\/span><\/p>\r\n\r\n

    Paying for Inventory Purchased on Credit<\/strong><\/h3>\r\nWhen 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 purchase discount account under the periodic inventory method.\r\n\r\nUsing 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).\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 10<\/td>\r\nAccounts Payable<\/td>\r\n30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Purchase Discounts (30,000 x 2%)<\/td>\r\n<\/td>\r\n600<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Cash (30,000 - 600)<\/td>\r\n<\/td>\r\n29,400<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record payment for merchandise less 2% discount.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe 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.\r\n\r\nAssume 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 Notice how accounts payable has been reduced to reflect the return.\u00a0 The journal entry for this payment would be:\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 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 Purchase Discounts (29,650 x 2%)<\/td>\r\n<\/td>\r\n593<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Cash (29,650 - 593)<\/td>\r\n<\/td>\r\n29,057<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record payment for merchandise less 2% discount.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe reduce the full amount owed on May 4 less the return of $350.\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.\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<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    May 30<\/td>\r\nAccounts Payable<\/td>\r\n30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n30,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record payment of merchandise with no discount.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Summary<\/strong><\/h3>\r\n

    Under periodic inventory procedure, the Merchandise Inventory account is updated periodically after a physical count has been made.<\/span>\u00a0 Companies using periodic inventory procedure make no entries to the Merchandise Inventory account<\/em> nor do they maintain unit records during the accounting period. Thus, these companies have no up-to-date balance against which to compare the physical inventory count at the end of the period. <\/span><\/span><\/p>","rendered":"

    Under periodic inventory procedure,<\/b> the Merchandise Inventory account is updated periodically after a physical count has been made<\/strong>. Usually, the physical count takes place immediately before the preparation of financial statements. This method is most effective for a\u00a0company with a small amount of inventory due to the labor required to do a physical count of inventory.\u00a0 Companies using periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Thus, these companies have no up-to-date balance against which to compare the physical inventory count at the end of the period. <\/span><\/p>\n

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