Purchases under a Perpetual System

Learning Outcomes

  • Record Purchases under a perpetual system

In previous sections, we’ve been using the periodic system to record Bryan Wholesale Co. and Geyer, Co. transactions. Let’s continue to use the same companies and record this invoice using a perpetual system for Geyer, Co.:

See the caption for the long description.

See the invoice long description here.

JournalPage 101
Date Description Post. Ref. Debit Credit
20XX
Dec 19 Merchandise Inventory 20,700.00
Dec 19       Accounts Payable 20,700.00
Dec 19 To record purchase of XPS-101 from Bryan Whls 200 count

This invoice looks logical and simple, and it is, except we also have to keep a subsidiary ledger listing all the items in stock and the assigned cost. The subsidiary ledger might look something like this:

Inventory List
Geyer, Co.
12/19/20XX
Product ID Description Unit Cost Quantity in Stock Total Inventory Value
A101 Wiring harness 99.00 30 2,970.00
CAB 500 HQ Speakers 58.00 500 29,000.00
CAB 600 HQ Speakers 99.00 15 1,485.00
MMM 333 GPS enabled sound system 1,255.50 65 81,607.50
Rel 5 HQ Speakers 110.00 100 11,000.00
RFS-212 GPS enabled sound system 650.00 150 97,500.00
XPS-101 GPS enabled sound system 103.50 200 20,700.00
Total Inventory Value $ 244,262.50

The subsidiary ledger should (MUST) match the GL control account as we make the entry to both ledgers.

T account for inventory. On the debit side, there is an entry of 223,562.50 dollars. On the debit side, there is an entry of 20,700 dollars. On the credit side, there is a note stating 'The credit side of this entry went to checking account'. There is a debit total of 244,262.50 dollars.

The GL account doesn’t give us the details we need. We rely on the subsidiary ledger for that.

Next, we return 40 units and post the journal entry to both ledgers:

JournalPage 101
Date Description Post. Ref. Debit Credit
20–
Dec 26 Accounts Payable 4,000.00
Dec 26       Merchandise Inventory 4,000.00
Dec 26 To record return on 40 XPS-101 to Bryant C.M 12-3–G

Our inventory list (subsidiary ledger) looks like this:

Inventory List
Geyer, Co.
12/19/20XX
Product ID Description Unit Cost Quantity in Stock Total Inventory Value
A101 Wiring harness 99.00 30 2,970.00
CAB 500 HQ Speakers 58.00 500 29,000.00
CAB 600 HQ Speakers 99.00 15 1,485.00
MMM 333 GPS enabled sound system 1,255.50 65 81,607.50
Rel 5 HQ Speakers 110.00 100 11,000.00
RFS-212 GPS enabled sound system 650.00 150 97,500.00
XPS-101 GPS enabled sound system 104.375 200 16,700.00
Total Inventory Value $ 240,262.50

And matches the GL control account:

T account for inventory. On the debit side, there is an entry of 223,562.50 dollars. On the debit side, there is an entry of 20,700 dollars. On the credit side, there is an entry of 4,000 dollars with a note stating 'the debit went to the accounts payable account'. There is a debit total of 240,262.50 dollars.

You can see how the GL control account would only give you a running total, while the subsidiary ledger gives you the detail by part number, just as the Accounts Receivable subsidiary ledger gives you receivables by customer and the Accounts Payable subsidiary ledger will give you payables (bills) by vendor.

In the Accounts Payable subsidiary ledger, we see that we owe Bryan $16,700 on invoice 1258.

Now let’s see what happens when we pay and take the discount:

JournalPage 101
Date Description Post. Ref. Debit Credit
20–
Dec 29 Accounts Payable 16,700.00
Dec 29       Merchandise Inventory 320.00
Dec 29       Checking Account 16,380.00
Dec 29 To record payment on Bryan inv. 1258

We (our computer, actually) posts the entry to the ledgers:

Inventory
Debit Credit
223,562.50
20,700.00
4,000.00
320.00
Double line 239,942.50 Double line
Inventory List
Geyer, Co.
12/19/20XX
Product ID Description Cost Quantity in Stock Total Inventory Value
A101 Wiring harness 99.00 30 2,970.00
CAB 500 HQ Speakers 58.00 500 29,000.00
CAB 600 HQ Speakers 99.00 15 1,485.00
MMM 333 GPS enabled sound system 1,255.50 65 81,607.50
Rel 5 HQ Speakers 110.00 100 11,000.00
RFS-212 GPS enabled sound system 650.00 150 97,500.00
XPS-101 GPS enabled sound system 102.375 160 16,380.00
Total Inventory Value $ 239,942.50

Using the net method would be similar; it would just post the net at first, and adjust the cost of merchandise inventory upward if the accounting staff missed the deadline.

Practice Questions

Here is a video review of accounting for purchases under a perpetual inventory system: