Inventory System, Continued Transactions inPerpetualInventorySystem As mentioned earlier, a perpetual inventory system attempts to maintain acontinual record of the

inventory on hand. Thus, if Joseph Labrador purchased merchandise for cash, P50,000, the entry to record this transactionis :Merchandise Inventory50,000Cash50,000To record merchandise bought.On the other hand, if Joseph sold P20,000 worth of merchandise for P40,000, the entry to record this transaction is:Cash40,000Sales40,000To record merchandise sold.Cost of Goods Sold20,000Merchandise Inventory 20,000To record the transfer of inventory soldto cost of goods sold account.Assuming this time, Joseph Labrador purchased from Mary Tradingmerchandise on account, Php 100,000. And at the same time, paid for thefreight on the said purchase, Php 2,500. The entries would be:Merchandise Inventory100,000Accounts Payable 100,000To record merchandise bought.Merchandise Inventory2,500Cash2,500To record freight paid. Continued on next page Marivic D. Valenzuela-Manalo Page 4of F Inventory System, Continued Transactions inPerpetualInventorySystem,cont. Let us say, after two days, Joseph returned defective merchandise boughtfrom Mary amounting to Php 5,000. The entry would be:Accounts Payable Mary Trading5,000Merchandise Inventory5,000To record returned merchandise.If on the other hand, Joseph Labrador sold to Michael Supermart merchandiseworth Php 50,000 on account at gross profit of 50 percent. The entries would be:Accounts Receivable50,000Sales50,000Sold merchandise on account.Cost of Goods Sold25,000Merchandise Inventory25,000To record cost of merchandise sold.Let us assume again that after three days, Michael issued a debitmemorandum amounting to Php 1,800 for defective goods received fromJoseph. The entries to record the return would be:Sales Returns & Allowances1,800Accounts Receivable1,800Received debit memorandum.Merchandise Inventory900Cost of Goods Sold900To record cost of good returned. Importance It is important to note that both periodic and perpetual inventory systems willrecord the sale of merchandise similarly. The only difference is that under the perpetual inventory system, there is a second entry that is required to berecorded together with the sale to indicate the transfer out of the amount soldfrom the Merchandise Inventory account to the Cost of Goods Sold account.It is possible to combine the two entries into a single compound entry withthe same debits and credits. For example:Cash40,000Cost of Goods Sold20,000Sales40,000Merchandise Inventory20,000 To record merchandise sold. Continued on next page Marivic D. Valenzuela-Manalo Page 5of F

Inventory System, Continued Pro-formaentry At the end of the year, no further entries may be required if the balance in theinventory account equals the actual cost of the units on hand. Unfortunately,this seldom happens. Despite the extra effort necessary to maintain a perpetual record of the inventory, the facts often differ from the records.When the facts conflict with the records, the records must be corrected toreflect the facts. Therefore, an adjusting entry is necessary to record anymissing inventory items and reduce the balance in the Inventory account tothe correct level. The pro-forma entry is:Merchandise Inventory Short or OverxxxMerchandise InventoryxxxTo adjust Inventory accountto actual balance. MerchandiseInventoryShort orOver The Merchandise Inventory Short or Over account is an expense account thatreflects the cost of missing inventory items. However, depending on itsmateriality and on normal practice within the industry, the inventoryshrinkage amount is often combined with cost of goods sold in the financialstatements. Net Income The net income disclosed on the income statements prepared under the twoinventory systems will reflect the same amount. This is also true with theending inventory balance reported in the balance sheet. A business thatcombined its Merchandise Inventory Shrinkage account with its Cost of Goods Sold account would prepare an income statement identical to the one prepared under the periodic inventory system. Marivic D. Valenzuela-Manalo Page 6of F

Merchandise Accounts Overview The discussion on this topic are the account titles to be used in recordingacquisition and sale of merchandise of a trading business using the periodicinventory system. Sales Sales of merchandise are recorded in this account at selling prices. This is atemporary or nominal account representing income from selling of merchandise. This account has a normal credit balance Sales ReturnsandAllowances This account is debited for all the merchandise returned by customers. Thedebit entry is at the original selling price of the merchandise. This account isalso being used for all goods delivered to customers but is found to bedefective or not as ordered and still the

buyer desiring to retain the goods asis. The customer in this case is normally permitted to deduct a certainamount from the selling prices of the goods delivered. Sales Discount This account is debited in the book of the seller whenever the buyer avails of the cash discounts provided by the seller. This is a deduction from salesaccount. Purchases This is a temporary account to which the cost of goods bought during the period is debited. This account usually has a debit balance at the end of theaccounting period. PurchaseReturnsandAllowances Goods bought and returned to supplier, or goods bought and received asdefective, or not as ordered, when not returned to the supplier but issubjected to a certain reductions from their acquisition prices. Thesedeductions and returns of purchased goods are credited to this account.Purchase returns and allowances account is a deduction from the Purchasesaccount. Continued on next page Marivic D. Valenzuela-Manalo Page 7of F

Merchandise Accounts, Continued MerchandiseInventory At the end of every accounting period, a physical count of the unsoldmerchandise on hand is taken. The total amount of these goods on hand isdebited to the Merchandise Inventory account. PurchaseDiscount This account is credited in the books of the buyer whenever the purchaser avails of the cash discount given by the seller. This is a deduction from Purchases account. Freight In orTransportationIn If the buyer pays the expenses of transporting the goods from the place of theseller to his place of business, such expenses are debited to the Freight-in account. Freight Out orTransportationOut

If the seller pays the expenses of transporting the goods from his place to the place of the buyer, such expenses are debited to the Freight out account.This is reported as part of operating expenses under the selling expensesclassification. Marivic D. Valenzuela-Manalo Page 8of F

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