Inventory Systems

1
Inventory Systems

• Review of Inventory Systems
• Perpetual Inventory System
• Periodic Inventory System

2
Accounting Cycle (Page 1 of 3)

• Transactions occur
• Documents are created
• Journalize the documents
• Post from journals to general ledger (GL) and/or
  subsidiary ledgers
• Prepare working trial balance-unadjusted trial
  balance from general ledger

3
Accounting Cycle (Page 2 of 3)

• Develop adjusting journal entries (AJEs)
• Enter AJEs on working trial balance
• Extend working trial balance to derive adjusted
  trial balance
• Complete working trial balance
• Income statement columns
• Balance sheet columns
• Prepare financial statements

4
Accounting Cycle (Page 3 of 3)

• Journalize AJEs in general journal
• Post AJEs from general journal to ledgers
• Journalize closing journal entries (CJEs) in
  general journal
• Post CJEs from general journal to ledgers
• Prepare post-closing trial balance

5
Inventory Systems

• Perpetual Inventory System
• Balance sheet balance is always correct
• Cost of goods sold account in GL
• Periodic Inventory System
• Balance sheet reflects beginning inventory
• Multiple purchase related accounts in the GL

6
Perpetual Inventory System Journal Entries (Page
1 of 3)

• Purchases of inventory are recorded in the
  merchandise inventory account (ASSET)
• Transportation costs on merchandise purchased are
  recorded in the merchandise inventory account

7
Perpetual Inventory System Journal Entries (Page
2 of 3)

• All returns of inventory and reductions in
  purchase price due to discounts are recorded as
  deductions to the merchandise inventory account
• Whenever a sale is made, TWO JOURNAL ENTRIES are
  needed.
• To record the Sale
• To record Cost of Merchandise Sold

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Perpetual Inventory System Journal Entries (Page
3 of 3)

• Whenever a customer returns merchandise, TWO
  JOURNAL ENTRIES must be made
• To record Sales Returns and Allowances
• To record reduce Cost of Merchandise Sold

9
Income Statement

• Revenue from Sales
• Sales
• Less Sales Returns Allowances
• Less Sales Discounts
• Net Sales
• Cost of Merchandise Sold
• Gross Profit

10
Periodic Inventory SystemJournal Entries (Page 1
of 3)

• The Merchandise Inventory Account reflects the
  beginning balance all year
• Purchases of merchandise inventory are debited to
  the Purchases account
• Sales of merchandise inventory are recorded with
  ONE JOURNAL ENTRY
• To record the sale of merchandise
• No entry to record the cost of merchandise sold

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Periodic Inventory SystemJournal Entries (Page 2
of 3)

• The Merchandise Inventory account in the GL is
  beginning inventory all year
• There is no Cost of Merchandise Sold
• Merchandise general ledger accounts
• Purchases
• Purchase returns and allowances
• Purchase discounts
• Transportation in

12
Periodic Inventory SystemJournal Entries (Page 3
of 3)

• At year end
• Inventory is counted
• Merchandise Inventory account is
• credited to remove old balance
• debited to record new balance
• The off setting entries are posted to Income
  Summary account
• Multi-Step Income Statement

13
Income Statement

• Revenue from Sales
• Sales
• Less Sales Returns Allowances
• Less Sales Discounts
• Net Sales
• Cost of Merchandise Sold
• Gross Profit
• For Periodic Inventory System see next slide

14
Income Statement Cost of Merchandise
SoldPeriodic Inventory System

• Cost of Merchandise Sold
• Beginning Merchandise Inventory
• Plus Cost of Merchandise Purchased
• Purchases
• Less Purchase Returns Allowances
• Less Purchase Discounts
• Net Purchases
• Plus Transportation In
• Cost of Merchandise Purchased
• Merchandise Available for Sale
• Less Ending Merchandise Inventory
• COST OF MERCHANDISE SOLD