Purchase inventory – Sells the inventory- Collects Cash this how the trading firms runs its business models; it is operating cycle.

-There will be impact in inventory (current asset account) of balance sheet, and revenue account and cost of goods sold (expense account) of income statement.

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Perpetual Inventory system

-popular due to bar codes

-It records: units purchased and cost amount, seller, inventory on hand and cost.

-Better Control of Inventory

  

Periodic Inventory System

-Goods counted periodically

-Normally used for relatively inexpensive goods

-Less popular due to computerized inventory systems

-Used by Small businesses,

 

 

 

 

 

Purchasing inventory

Invoice contains following deatails

 

The invoice contains

The seller

The purchaser

The date of purchase

Credit terms

Total amount due

The due date

 

Inventory account is impacted by discount, returned items, early payment, Shipping costs

 

Journal Entry for Purchase of Inventory

 

Inventory ( A+)    Dr…

To Amount Payable (L+) Cr….

 

Affected accounts

 Inventory: debit Increase, Credit Decrease

Purchased on account: accounts payable

If purchased by Cash: Cash

 

Purchase discounts

 2/10: 2 % discount if the buyer paid within 10 days

n/30: full amount is due within 30 days

eom: end of month

 

 

Payment within the Discount period

Debit: Accounts Payable for invoice amount

Credit:  1. Cash for the actual payment amount (Gross amount- discount) 2. Inventory for the discount amount.

 

Journal:

Account Payable (L-)

 To Cash ( A+)

To Inventory ( A-)   

(paid within discount period)

But if the payment is send after the discount period, then no need to reduce inventory account

Account payable Dr.

To Cash  CR.

 

 

B. Purchase Returns and Allowances

Debit: Accounts Payable for amount returned

Credit: Inventory for the amount returned

( reverses original purchase entry:

 

Account Paybale ( L-) DR.

Inventory  ( A-)..Cr

(being, Returned inventory to seller-vendor. )

 

 

Purchaser normally pays freights charges

Increase coast of inventory (debit: Inventory)

Pay by Cash (credit: cash)

 

Purchase Discount- Shipping in added to Invoice

**Discount (assume 3/15; n/30) applied to inventory coast only. No discount computed on freight cost

 

Inventory Account

+purchases of inventory

-Purchase returns & Allowances

-Purchase Discount

+Freight in (FOB shipping point)

=Net cost of Inventory

 

 

Practise

 

KC Toys busy $ 185800 worth of MegoBlock toys on  July 8, 2012 credit terms of 2/10, n/30. Some of the goods are damaged in shipment, so KC Toys returns $ 18530 of the merchandise to MegoBlock on July 12, 2012.

 

1. How much must KC Toys pay MegoBlock?

A) After the discount period? (no discounts)

Original Purchase amount $185800

Less: Purchase (18530)

Cost of Inventory kept by KC toys   $167270

 

 

 

 


b) Within the discount period (ex: on July 15)?

 

Original Purchase amount $185800

Less: Purchase of returns (first minus) (18530)

Cost of Inventory kept by KC Toys   (167270)

Less: discount amount (167270*0.02)

Cost of Inventory with discount (163924.6)

 

 

 

1 journalize the following transactions.

 

a. Purchase of the goods on July 8, 2012

Inventory      185000

Accounts Payable   18500

(being….

b. Return of the damaged goods on July 12, 2012

Accounts payable    18530

To Inventory     18530

(being….

C. Payment on July 15, 2012.

Account payable (185800-18530)

Inventory ( 167270*.02)

Cash ( 167270*.98)

(being….

 

 

2. In the final analysis, how much did the inventory cost KC toys?

 

Cost of inventory kept by KC toys:  167270

Less: Discount amount 2%  3345

Cost of Inventory with discount:  163925

 

 

 

Account for the sale of Inventory using a perpetual system

 

Sales made to Customers: Sales returns and Allowances-Sales Discounts=Net sales

 

 

A.      Sale of Inventory

Entry 1: Sales Revenue (Revenue account: Credit Balance)

Amount earned from selling inventory

Retail price of the inventory sold to customer

 

Cash (A+) (accounts receivable)

To Sales Revenue (R+) (Revenue Account increase)

 

Entry 2: Cost of Goods Sold (Expense Account: debit Balance)

 

The cost of Inventory sold to customers

The merchandiser’s major expense

Cost of goods sold ( E+) ( expense account increase)

Inventory (A-)

 

B. Sale of Inventory issues

Sales returns and allowances (contra revenue account: Debit balance)

Sales returns: when Customer returns goods or refuses services

Sales allowances: merchandise is defective, damaged, or otherwise unsuitable. Seller grants a reduction in price to customer

This allowance will reduce the cash to be collected from the customer.

Customer keeps the non-standard goods.


 

Process of sales Returns

 

Sales Returns and allowances (CR+)

Account Receivable ( A-)

(being received returned goods)

 

 

Inventory ( A+)

Cost of goods sold ( E-)

(Placed goods back in inventory

 

Sales Discounts (Contra revenue account)

Normal Balance; Debit Side

Seller has credit terms. Customer pays within the discount period=Reduce Sales

Example: our company is collecting sales on account ( $6500) from a customer who is paying within the discount period ( 2/10, n/30). Entry

Cash (A+) 6370

Sales discounts ($6500 *0.02) 130

Accounts Receivable (A-)  6500

 

 

FOB Destination

1.Purchaser owns inventory when goods arrive

2.Seller pays freight

Note: No entry is journalized in the purchaser’s book and delivery expense is listed under operation expenses.


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 1. Example