Learning Outcomes
- Record sales using a perpetual system
Approaching the end of the year, here is the state of affairs as we have described them so far. We have ignored sales and other purchases in order to keep things simple, but now let’s record a sale of inventory from our stock in hand.
Debit | Credit |
---|---|
223,562.50 | |
20,700.00 | |
4,000.00 | |
320.00 | |
Double line 239,942.50 | Double line |
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 |
We’ll sell one MMM-333 sound system and nothing else, again, for illustrative purposes and to keep things simpler than they are in real life. We’ll use the gross method: we’ll sell to retail customers who use a debit or credit card, and we’ll collect 8% state and local combined sales tax.
Here is the journal entry:
Date | Description | Post. Ref. | Debit | Credit |
---|---|---|---|---|
20– | ||||
Dec 31 | Checking Account | 2,159.99 | ||
Dec 31 | Sales Taxes Payable | 160.00 | ||
Dec 31 | Sales Revenue | 1,999.99 | ||
Dec 31 | Cost of Goods Sold | 1,255.50 | ||
Dec 31 | Merchandise Inventory | 1,255.50 | ||
Dec 31 | To record sale of MMM-333 to Paul Smith |
A lot is going on here, and this entry could be two journal entries, but often it’s not. Here we’ve violated the rule of debits first and then credits, simply in order to help clarify the entry.
- The deposit to the checking account includes both the sales price of $1,999.99 and the sales tax collected on behalf of the taxing authority (the state, in this case). The seller is required to collect that money from the buyer and then send it to the state on the buyer’s behalf because the state doesn’t trust the buyer to fill out the forms and remit the sales and use tax. That $160 is a payable because it is not our money. We owe it to the state and the state tax enforcement agents will come after us if we don’t send it in on time.
- Every time we make a sale under the perpetual system of accounting, we move the cost of the item sold from the asset account Merchandise Inventory to COGS, mirroring the actual movement of the product from the shelf into the hands (and the car) of the buyer. We recognize revenue as earned (when title passes as we hand over the goods) and the expense as it matches the revenue.
Posting the journal entry updates our ledgers by removing the cost of one sound system:
Debit | Credit |
---|---|
223,562.50 | |
20,700.00 | |
4,000.00 | |
320.00 | |
1,255.50 | |
Double line 238,687.00 | Double line |
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 | 64 | 80,352.00 |
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 | $ 238,687.00 |
Although we don’t use Purchases and the related contra accounts under the perpetual method, the revenue accounts are the same.
Periodic Method | Perpetual Method |
---|---|
Sales Revenue—gross sales are posted here as a credit | Sales Revenue—gross sales are posted here as a credit |
Sales Discounts (Contra Account)—sales discounts are posted here as a debit | Sales Discounts (Contra Account)—sales discounts are posted here as a debit |
Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit | Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit |
Periodic Method | Perpetual Method |
---|---|
Sales Revenue—net sales are posted here as a credit | Sales Revenue—net sales are posted here as a credit |
Sales Discounts Forfeited—sales discounts not claimed by the customer are posted here as a credit | Sales Discounts Forfeited—sales discounts not claimed by the customer are posted here as a credit |
Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit | Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit |
Practice Question
Next, we’ll see how the perpetual method can be used for inventory control.