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Accounting Terms Dictionary

Recording Inventory Transactions

Recording Inventory Transactions

1. Two methods of recording inventory transactions
(1) Perpetual inventory system
(2) Periodic inventory system

2. Perpetual inventory system
--> records purchases to inventory account
--> each time transaction occurs
--> inventory account is updated continuously during the period

3. Periodic inventory system
--> records purchases to purchases account
--> inventory account is updated only at the end of the period
--> based on the results of physical inventory taking

[Example 1]

January 1, 2011
Entity A had 400 units of merchandise in inventory at $10 per unit cost

5. January 10, 2011
Entity A purchased 500 units of merchandise at $10 per unit price on credit

Journal entry for perpetual inventory system

  debitcredit
Merchandise inventory5,000 
      Accounts payable 5,000


Journal entry for periodic inventory system

  debitcredit
Purchases5,000 
      Accounts payable 5,000


6. January 20, 2011
Entity A purchased 600 units of merchandise at $10 per unit price on credit


Journal entry for perpetual inventory system

  debitcredit
Merchandise inventory6,000 
      Accounts payable 6,000


Journal entry for periodic inventory system

  debitcredit
Purchases6,000 
      Accounts payable 6,000


7. January 25, 2011
Entity A sold 700 units of merchandise at $15 per unit price on credit

Journal entry for perpetual inventory system
To record sale s revenue

  debitcredit
Accounts receivable10,500 
      Sales 10,500


To record cost of goods sold

  debitcredit
Cost of goods sold7,000 
      Merchandise inventory 7,000


Journal entry for periodic inventory system

To record sale s revenue

  debitcredit
Accounts receivable10,500 
      Sales 10,500


No journal entry is prepared to record cost of goods sold during the period
--> cost of goods sold is recorded only at the end of the period

8. January 31, 2011
Entity A took physical inventory and counted 800 units of merchandise inventory

Journal entry for perpetual inventory system
--> no journal entry is prepared
--> inventory and cost of goods sold accounts are updated
--> continuously during the period

Journal entry for periodic inventory system

Beginning inventory = 400 units x $10 = $4,000
Purchases = 500 unit x $10 + 600 units x $10 = $11,000
Cost of goods sold = 700 units x $10 =$7,000
Ending inventory = 800 units x $10 = $8,000

Beginning inventory and purchases are redistributed
--> to cost of goods sold and ending inventory


  debitcredit
Cost of goods sold7,000 
Merchandise inventory8,000 
      Merchandise inventory 4,000
      Purchases 11,000


9. Gross profit is same for both methods of inventory recording
Sales revenue - Cost of goods sold
= $10,500 - $7,000 = $3,500



Index of Accounting Terms Dictionary


U.S. GAAP by Codification Topic 
 
 105  GAAP Hierarchy 
 105  GAAP History 

 205  Presentation of Financial Statements 
 205-20 Discontinued Operations 
 210  Balance Sheet 
 210-20 Offsetting 
 220  Comprehensive Income 
 225  Income Statement 
 225-20 Extraordinary and Unusual Items 
 230  Statement of Cash Flows 
 250  Accounting Changes and Error Corrections 
 260  Earnings per Share 
 270  Interim Reporting
 
 310  Impairment of a Loan
 320  Investment Securities 
 320  Other-Than-Temporary Impairments, FSP FAS 115-2 
 320-10-05 Overview of Investments in Other Entities 
 320-10-35 Reclassification of Investments in Securities
 323-10 Equity Method Investments
 323-30 Investments in Partnerships and Joint Ventures 
 325-20 Cost Method Investments 
 330  Inventory

 340-20 Capitalized Advertising Costs 
 350-20 Goodwill 
 350-30 Intangibles Other than Goodwill 
 350-40 Internal-Use Software 
 350-50 Website Development Costs 
 360  Property, Plant and Equipment
 360-20 Real Estate Sales 
 
 410  Asset Retirement and Environmental Obligations 
 420  Exit or Disposal Cost Obligations 
 450  Contingencies 
 450-20 Loss Contingencies 
 450-30 Gain Contingencies
 480  Redeemable Financial Instruments 

 505-20 Stock Dividends, Stock Splits 
 505-30 Treasury Stock


 605  SEC Staff Accounting Bulletin, Topic 13 
 605-25 Revenue Recognition - Multiple Element Arrangements 
 
 715-30 Defined Benefit Plans - Pension
 718  Share-Based Payment 
 730  Research and Development 
 730-20 Research and Development Arrangements 

 805  Business Combinations  
 810  Consolidation 
 810  Noncontrolling Interests 
 810  Consolidation of Variable Interest Entities, SFAS 167 
 
 815  Derivatives and Hedging Overview 

 820  Fair Value Measurements  
 820  Fair value when the markets are not active, FSP FAS 157-4
 825  Fair Value Option 

 830  Foreign Currency Matters 
 830-20 Foreign Currency Transactions 
 830-30 Translation of Financial Statements 
 835  Interest 
 835-20 Capitalization of Interest 
 835-30 Imputation of Interest 

 840  Leases 
 840-20 Operating Leases 
 840-30 Capital Leases 
 840-40 Sale-Leaseback Transactions
 845  Nonmonetary Transactions 

 855  Subsequent Events 
 860-20 Sale of Financial Assets, SFAS 166 
 860-50 Servicing Assets and Liabilities, SFAS 156 

 985-20 Costs of software to be sold  


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