System Basics
This inventory system tracks inventory in real time after every single sale
Perpetual Inventory System
You buy $120 of inventory on account.
Debit Merchandise Inventory ($120) and Credit Accounts Payable ($120)
You buy $200 of merchandise on account.
Debit Purchases ($200) and Credit Accounts Payable ($200)
In this system, inventory levels are determined only by a physical count at the end of an accounting period.
Periodic Inventory System
In a Periodic system, purchases are recorded in this account instead of Merchandise Inventory.
You return $100 of merchandise bought on account.
Debit Accounts Payable ($100) and Credit Merchandise Inventory ($100)
You pay $400 cash for shipping costs on goods arriving at your business.
Debit Freight-In ($400) and Credit Cash ($400)
In a Perpetual system, a sales return of a sellable item requires how many journal entries?
2
These are the two Purchase-related accounts in a Periodic system that have a normal Credit balance.
"Purchase Returns & Allowances" and "Purchase Discounts"
This account represents what the business paid for the item, not what the customer paid.
Cost of goods sold (COGS)
This term refers to the cost of shipping goods into your business.
Freight-In
You sell goods for $500 cash (the cost of the goods was $300).
Entry #1: Debit Cash ($500), Credit Sales ($500)
Entry #2: Debit COGS ($300), Credit Merchandise Inventory ($300)
You sell goods for $500 on account.
Debit Accounts Receivable ($500) and Credit Sales ($500) (Reminder: No COGS entry needed here!)
Under the Perpetual system, a physical count is still done occasionally for this reason.
Theft (or loss of goods, or damaged goods)
Goods sold to someone are returned to you. Tranasction was completed with cash. Goods are damaged. Record this transaction.
Debit Sales Returns & Allowances; Credit Cash