Which accounts are debited in perpetual inventory system?
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The accounting is very different for sellers than for buyers. Remember, under the perpetual inventory method, we used a combination of 3 accounts (Cash, Inventory and Accounts Payable) on the buyer side. This is not the case for the seller. The seller will use the following accounts: NameAccount TypeIncreasesDecreasesCashCurrent assetDebitCreditAccounts ReceivableCurrent assetDebitCreditMerchandise InventoryCurrent assetDebitCreditSales RevenueRevenueCreditDebitSales Discounts*RevenueDebitCreditSales Returns and Allowances*RevenueDebitCreditCost of Goods SoldExpenseDebitCreditDelivery ExpenseExpenseDebitCredit*Sales discounts and sales returns and allowances are contra-accounts. Notice how they increase with a debit and decrease with a credit even though they are revenue accounts. Cost of goods sold Cost of goods sold is exactly what the account name reads: it is the cost of the goods merchandise inventory) to the seller that is now being sold to customers. Cost of goods sold is not the price charged to customers but what a company paid for the goods they are now selling. Cost of Goods Sold is an EXPENSE item. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue. Watch this video on seller entries before we look at them in more detail. Recording SalesSales are recorded in a Sales Revenue (or Sales) account and is the price we charge to the customers. Sales can be cash or have credit terms (on account) using Accounts Receivable since we will receive money from the customer in the future. To record sales, we will debit Cash or Accounts Receivable, depending on payment, and credit Sales Revenue. But, we must also match the revenue and expenses incurred (remember the matching principle?) and we will record the expense cost of goods sold. Remember, cost of goods sold is the seller’s cost for the items they are now selling to a customer and is NOT the selling price. We begin learning this concept by having cost of goods sold amounts provided but in a later section, you will learn to calculate the amount yourself. We will debit the expense Cost of Goods Sold but what was it we were selling? Right! Merchandise or merchandise inventory so we will reduce (credit) merchandise inventory since we no longer have the goods. To illustrate the perpetual inventory method journal entries, assume that Smith Company made two sales of merchandise to Hanlon Food Store:
The journal entries to record the sale and cost of goods sold for each date would be: DateAccountDebitCreditMay 4Accounts Receivable30,000Sales Revenue30,000To record sale of merchandise on creditMay 4Cost of goods sold18,000Merchandise Inventory18,000To record cost of merchandise sold to customers.May 21Cash20,000Sales Revenue20,000To record sale of merchandise for cash.May 21Cost of goods sold15,000Merchandise Inventory15,000To record cost of merchandise sold to customers.Notice how each transaction has 2 entries. One to record the sale to the customer and one to record the usage of inventory as a cost of goods sold. Shipping on SalesWe learned shipping terms tells you who is responsible for paying for shipping. FOB Destination means the seller is responsible for paying shipping and the buyer would not need to pay or record anything for shipping. FOB Shipping Point means the buyer is responsible for shipping and must pay and record for shipping. As the seller, we will record any shipping costs in the Delivery Expense account as a debit. We will credit cash or accounts payable, depending on if we paid it or not. In our two transactions above, the May 4 sale has shipping terms of FOB Destination so the seller would pay for shipping. In the May 21 sale, the shipping terms FOB Shipping Point means the buyer is responsible and the seller will not record anything for shipping. Smith Company paid $100 cash on May 4 for shipping on the May 4 sale to Hanlon Food Store. The journal entry to record this transaction would be: DateAccountDebitCreditMay 4Delivery Expense100Cash100To record shipping costs for sales.Sales Returns and AllowancesMerchandising companies usually allow customers to return goods that are defective or unsatisfactory for a variety of reasons, such as wrong color, wrong size, wrong style, wrong amounts, or inferior quality. A sales return is merchandise returned by a buyer. A sales allowance is a deduction from the original invoiced sales price granted when the customer keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit. When a seller agrees to the sales return or sales allowance, the seller sends the buyer a credit memorandum indicating a reduction (crediting) of the buyer’s account receivable. A credit memorandum becomes the basis for recording a sales return or a sales allowance. In theory, sellers could record both sales returns and sales allowances as debits to the Sales account because they cancel part of the recorded selling price. However, because the amount of sales returns and sales allowances is useful information to management, it should be shown separately. The amount of returns and allowances in relation to goods sold can indicate the quality of the goods (high-return percentage, equals low quality) or of pressure applied by salespersons (high-return percentage, equals high-pressure sales). Sellers record sales returns and sales allowances in a separate Sales Returns and Allowances account. The Sales Returns and Allowances account is a contra revenue account (to Sales) that records the selling price of merchandise returned by buyers or reductions in selling prices granted. The accounting method will be different for a sales return and an allowance. In a sales allowance, the customer is not returning any merchandise and we will only adjust the customer side of the transactions (sales and accounts receivable). In a sales return, the customer is actually returning merchandise. We will need to reduce the customer side (sales and accounts receivable) and increase the inventory side (inventory and cost of goods sold). The inventory is returned to the seller which means we need to add it back to inventory and remove the expense since it is no longer sold. Following are two examples illustrating the recording of sales returns in the Sales Returns and Allowances account:
If the customer has already paid the account, the credit is to Cash instead of Accounts Receivable. If the customer took a 2% discount when paying the account, the refund entry would be: AccountDebitCreditSales Returns and Allowances400Sales Discounts (400 x 2%)8Cash (400 – 8)392To record sales allowance refund to customer less discount.
If the customer has already paid the account, the credit is to Cash instead of Accounts Receivable. If the customer took a 2% discount when paying the account, the refund entry would be (note: there would be no change to the inventory entry): AccountDebitCreditSales Returns and Allowances300Sales Discounts (400 x 2%)6Accounts Receivable294To record customer refund with 2% discount.Merchandise Inventory200Cost of goods sold200To record receipt of returned merchandise.Receiving Payment from CustomersRemember, the credit terms (or terms) provides information to the buyer about when the invoice is due and if there is a discount allowed for paying the invoice early. The discount is not recorded until payment is received because the seller does not know if a buyer will take the discount or not. Discounts are recorded in a contra-revenue account called Sales Discounts. Receiving payment will affect the customer side only and not inventory. We will be reducing the amount owed by the customer (accounts receivable) and increasing sales discounts (if any) and cash. For example, Smith Company receives payment of the May 4 invoice from Hanlon Food Store on May 10. The customer took the 2% discount. The entry to record this transaction would be: DateAccountDebitCreditMay 10Sales Discounts (30,000 x 2%)600Cash (30,000 – 600)29,400Accounts Receivable30,000To record customer payment with 2% discount.If Hanlon had returned merchandise for $300 before paying the invoice, the entry to record this transaction with a 2% discount would be: AccountDebitCreditSales Discounts (29,700 x 2%)594Cash (29,700 – 594)29,106Accounts Receivable29,700To record customer payment with 2% discount and return.Note: This entry is the same with a sales return or a sales allowance. If Hanlon had a $400 allowance but paid the invoice after the discount period on May 30, the entry to record the transaction (less the allowance) would be: DateAccountDebitCreditMay 30Cash (30,000 – 400)29,600Accounts Receivable (30,000 – 400)29,600To record customer payment less allowance and no discount.SummaryCost of goods sold is not the price charged to customers but what a company paid for the goods they are now selling. Cost of Goods Sold is an EXPENSE item. Sales Discounts and Sales Returns and Allowances are contra-revenue accounts meaning they are REVENUE accounts but debits will increase and credits will decrease. Sales revenue and sales return entries require 2 entries: one for the customer side (accounts receivable and sales) and one for the inventory side (cost of goods sold and inventory). Sales allowances require only the customer side. A Open Assessments element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llfinancialaccounting/?p=112 CC licensed content, Shared previously
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5.4: Seller Entries under Perpetual Inventory Method is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts. Which accounts are used in the perpetual inventory system?In a perpetual system, you record purchases in the raw materials inventory account or the merchandise account.
What account is debited when recording a inventory purchase using the perpetual inventory system?The Merchandise Inventory account is debited when recording the purchase of inventory using the perpetual inventory system.
What is included in a perpetual inventory record?A perpetual inventory system is a system used to track and record stock levels, in which every purchase and sale of stock is logged automatically and immediately. In this system, every time a transaction takes place, the software records a change in inventory levels in real-time.
What is the journal entry when using a perpetual inventory system?In a perpetual system, two journal entries are required when a business makes a sale: one to record the sale and one to record the cost of the sale. In the first journal entry, Marcia records the revenue from the sale, or the amount she earned from selling her products.
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