Chapter 5

Businesses that sell a product to customers

Inventory

Merchandise held for sale

Asset account

Copyright (c) 2009 Prentice Hall. All rights reserved.

Describe and illustrate merchandising

operations and the two types of inventory
systems
Copyright (c) 2009 Prentice Hall. All rights reserved.

Balance Sheet

Inventory
Asset

Income Statement

Sales revenue
Cost of goods sold

Expense

Copyright (c) 2009 Prentice Hall. All rights reserved.

Cash

Purchase
inventor
y

Collect
cash
from
customer
s
Accounts
receivable

Sell
inventor
y

Copyright (c) 2009 Prentice Hall. All rights reserved.

Inventory

PERIODIC

Goods counted
periodically to
determine quantity
Used by small
businesses
Less popular now
because of
computerized
inventory systems

PERPETUAL

Record of quantity of
goods is constantly
updated
Better control of
inventory
Popular now due to
bar codes and
computer scanning

Copyright (c) 2009 Prentice Hall. All rights reserved.

Account for the purchase of inventory using a

perpetual system

Copyright (c) 2009 Prentice Hall. All rights reserved.

The inventory account is increased each

time merchandise is purchased
The vendor provides an invoice showing the
quantity and cost of the items
Inventory cost is also impacted by:

Shipping costs
Return of purchased items
Discounts for early payment

Copyright (c) 2009 Prentice Hall. All rights reserved.

GENERAL JOURNAL
DATE

DESCRIPTION

REF

Inventory
Accounts payable

DEBIT

CREDIT

$$$$

Purchased inventory on account

Copyright (c) 2009. Prentice Hall. All rights reserved.

$$$$

Discount for early payment

Expressed as follows:

2/10 ,
n/30

2% discount if
paid within 10
days

Full amount due

within 30 days

Other terms:

n/30

No discount, full
amount due in 30
days

eom

Full amount due

by the end of
month

Copyright (c) 2009 Prentice Hall. All rights reserved.

10

GENERAL JOURNAL
DATE

DESCRIPTION

REF

Accounts payable
Cash
Inventory
Paid within discount period

DEBIT

CREDIT

$$$$

Copyright (c) 2009. Prentice Hall. All rights reserved.

$$$$
$$$

Purchase return
Merchandise returned by the purchaser to the
supplier

Purchase allowance
Seller reduces amount owed
Incentive for purchaser to keep goods

Copyright (c) 2009 Prentice Hall. All rights reserved.

12

GENERAL JOURNAL
DATE

DESCRIPTION

REF

Accounts payable
Inventory
Returned damaged goods

DEBIT

CREDIT

$$$$
$$$$

Reverse of purchase
entry
Decreases both accounts
payable and inventory
Copyright (c) 2009. Prentice Hall. All rights reserved.

Account for the sale of inventory using a

perpetual system

Copyright (c) 2009 Prentice Hall. All rights reserved.

14

Sales revenue
Amount earned from selling inventory
Revenue account

Cost of goods sold

Cost of inventory that has been sold to customers
Expense account

Copyright (c) 2009 Prentice Hall. All rights reserved.

15

GENERAL JOURNAL
DATE

DESCRIPTION

REF

DEBIT

Accounts receivable (or Cash)

Sales revenue
To record sales on account

$$$$$

Cost of goods sold

Inventory
To record cost of sales

$$$$$

CREDIT

$$$$$

$$$$$

Copyright (c) 2009 Prentice Hall. All rights reserved.

16

Sales returns & allowances

When customer returns goods or the seller grants

a reduction in price to customer
Contra-revenue account (debit balance)

Sales discounts

If customer pays within the discount period

allowed by the seller
Contra-revenue account (debit balance)

Freight-out

Delivery expense
If terms are FOB shipping point

Copyright (c) 2009 Prentice Hall. All rights reserved.

17

GENERAL JOURNAL
DATE

DESCRIPTION

REF

Sales returns and allowances

Accounts receivable
Inventory
Cost of goods sold

DEBIT

CREDIT

$$$$
$$$$
$$$$
$$$$

Customer returned
merchandise

Copyright (c) 2009 Prentice Hall. All rights reserved.

18

GENERAL JOURNAL
DATE

DESCRIPTION

REF

Cash
Sales discounts
Accounts receivable

DEBIT

CREDIT

$$$$$
$$$$
$$$$$

Collected on account within discount period

Copyright (c) 2009 Prentice Hall. All rights reserved.

19

Sales
minus

Sales Returns &

Allowances
minus

Sales Discounts
equals

Net Sales
Copyright (c) 2009 Prentice Hall. All rights reserved.

20

Net Sales
minu
s

Cost of Goods Sold

equals

Gross Profit
Copyright (c) 2009 Prentice Hall. All rights
reserved.

21