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Inventory Systems

Inventory Systems. Review of Inventory Systems Perpetual Inventory System Periodic Inventory System. 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

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Inventory Systems

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  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

  8. 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

  11. 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

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