Lesson: 41

Topic: Merchandising Transactions within the Perpetual Inventory System

Objective:

Once we have taken up last day's problem, we will analyze merchandising transactions within a perpetual inventory system.

Perpetual Inventory: A system of calculating the cost of goods sold by automatically updating the inventory with each sale of an inventory item.

Cost of Goods Sold: Refers to the total expense of inventory which has been sold. Under the "Perpetual" inventory system the Cost of Goods Sold is actually an account.

Merchandise: A current asset account which indicates the value of merchandise which remains unsold at any point in time throughout the accounting period.

The class will view a Power Point presentation which explains the accounting principles associated with maintaining a "Periodic" inventory system.

Typical Purchase and Sale Transaction Entries for a Merchandising Firm Which Uses the Perpetual Inventory System

Step	Objective
1	Purchase of Merchandise.
2	Sale of Merchandise.

The Closing Entries for a Merchandising Firm Which Uses the Perpetual Inventory System

The closing entries for a merchandising firm which uses the perpetual inventory system is still a four-step process. However, you will notice that the Cost of Goods Sold account is closed along with all of the other expense accounts.

Step	Objective
1	Close the Sales account.
2	Close the expense accounts (including the Cost of Goods Sold account).
3	Close the Revenue and Expense Summary to the Capital account.
4	Close the Drawings account to the Capital account.

A Typical Purchase of Merchandise

• We debit an asset account which we call Merchandise, and we credit Cash (assuming that we paid cash). We will expense the merchandise only at the time that it is sold. We can do this because the store's computer system will recognize the loss of the inventory when the item is scanned by an optical character recognition system at the time of the sale.

  Thus, the inventory system is perpetually updated after each sale.

  
  

Date	Account	Debit	Credit
Dec. 31	Merchandise	10,000.00
	Cash		10,000.00

A Typical Sale of Merchandise

• We will perform a compound entry which will record both the sale of the merchandise AND the loss of the merchadise. Thus, we will debit Cash, and credit Sales in order to record the sale. We will record the loss of the inventory by debiting an expense account called Cost of Goods Sold and then crediting the Merchandise account.

  Note that we expense the merchandise only at the time that it is sold. We are able to do this because the store's computer system recognizes the loss of the inventory when the item is scanned by the optical character recognition system at the time of the sale.

  
  

Date	Account	Debit	Credit
Dec. 31	Cash	600.00
	Cost of Goods Sold	400.00
	Sales		600.00
	Merchandise		400.00

Step 1

• Transfer the balance of the Sales account to the Revenue and Expense Summary.

  
  

Date	Account	Debit	Credit
Dec. 31	Sales	50,000.00
	Revenue & Expense Summary		50,000.00

Step 2

• Transfer the balance of the expense accounts (including the Cost of Goods Sold account) to the Revenue and Expense Summary.

  
  

Date	Account	Debit	Credit
Dec. 31	Revenue and Expense Summary	21,000.00
	Cost of Goods Sold		14,500.00
	Rent Expense		2,000.00
	Wages Expense		4,000.00
	Hydro Expense		500.00

Step 3

Transfer the balance of the Revenue and Expense Summary to the Capital account:

Date	Account	Debit	Credit
Dec. 31	Revenue and Expense Summary	29,000.00
	Capital		29,000.00

Step 4

Transfer the balance of the Drawings account to the Capital account.

Date	Account	Debit	Credit
Dec. 31	Capital	700.00
	Drawings		700.00

Method of Instruction and Evaluation:

Students will complete the following exercise:

Record the following merchandising transactions within a General Journal twice - once for a "periodic" inventory system and once for a "perpetual" inventory system:

Note: Assume this is the first year of operation for this business.

Date	Transaction
April 1	Purchase $7,000.00 of inventory (on account).
April 5	Sell $1,000.00 of inventory for $1,500.00 (received cash).
April 13	Sell $500.00 of inventory for $750.00 (on account).
April 19	Purchase $3,000.00 of inventory (paid cash).
April 23	Sell $2,000.00 of inventory for $3,000.00 (on account).
April 30	Record the closing entries for this accounting period.

References:

• Text: chapter #12, pages 462 - 465.
• Power Point Presentation: The Mystery of Perpetual Inventory.