Merchandise Inventory-Tablet Computers decreases (credit) for the amount of the discount ($4,020 × 5%). Cash decreases (credit) for the amount owed, less the discount. Since CBS paid on May 10, they made the 10-day window and thus received a discount of 5%. The following entry occurs.Īccounts Payable decreases (debit) for the original amount owed of $4,020 before any discounts are taken. On May 10, CBS pays their account in full. These credit terms include a discount opportunity (5/10), meaning, CBS has 10 days from the invoice date to pay on their account to receive a 5% discount on their purchase. Accounts Payable also increases (credit) but the credit terms are a little different than the previous example. Merchandise Inventory-Tablet Computers increases (debit) in the amount of $4,020 (67 × $60). The payment terms are 5/10, n/30, and the invoice is dated May 1. On May 1, CBS purchases 67 tablet computers at a cost of $60 each on credit. Purchase Discount Transaction Journal Entries No discount was offered with this transaction. The credit terms were n/15, which is net due in 15 days. The following entry occurs.Īccounts Payable decreases (debit), and Cash decreases (credit) for the full amount owed. On April 17, CBS makes full payment on the amount due from the April 7 purchase. Since the computers were purchased on credit by CBS, Accounts Payable increases (credit). Merchandise Inventory is specific to desktop computers and is increased (debited) for the value of the computers by $12,000 ($400 × 30). ![]() ![]() The credit terms are n/15 with an invoice date of April 7. On April 7, CBS purchases 30 desktop computers on credit at a cost of $400 each. It is important to distinguish each inventory item type to better track inventory needs. Merchandise Inventory-Packages increases (debit) for 6,200 ($620 × 10), and Cash decreases (credit) because the company paid with cash. CBS has enough cash-on-hand to pay immediately with cash. On April 1, CBS purchases 10 electronic hardware packages at a cost of $620 each. Cash and Credit Purchase Transaction Journal Entries The following are the per-item purchase prices from the manufacturer. (credit: modification of “Professionnal desk” by “reynermedia”/Flickr, CC BY 2.0)ĬBS purchases each electronic product from a manufacturer. Providing businesses electronic hardware solutions. The $90 assigned to the item that was sold is permanently gone from inventory.Figure 6.9 California Business Solutions. (If two items were sold, $90 would be assigned to the first item and $89 to the second item.) The remaining $350 is assigned to inventory. Under periodic LIFO we assign the last cost of $90 to the one item that was sold. If that was the only item sold during the year, at the end of the year the Cost of Goods Sold account will have a balance of $89 and the cost in the Inventory account will be $351 ($85 + $87 + $89 + $90). Under perpetual LIFO the following entry must be made at the time of the sale: $89 will be credited to Inventory and $89 will be debited from Cost of Goods Sold. Generally this means that periodic LIFO will result in lower income taxes than perpetual LIFO.ĭ If costs continue to rise throughout the entire year, perpetual LIFO will yield a lower cost of goods sold and a higher net income than periodic LIFO. An entry must be recorded at the time of the sale in order to reduce the Inventory account and increase the Cost of Goods Sold account. ![]() Since this is the perpetual system, we cannot wait until the end of the year to determine the last cost. With perpetual LIFO, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. ![]() In other words, the first costs are the same whether you move the cost out of inventory with each sale (perpetual) or whether you wait until the year is over (periodic). The end result under perpetual FIFO is the same as under periodic FIFO. With perpetual FIFO, the first (or oldest) costs are the first moved from the Inventory account and debited to the Cost of Goods Sold account. Cost of goods sold or cost of sale is computed from the ending inventory figure. The "Inventory" account is updated on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly). The periodic inventory system records inventory purchase or sale in the "Purchases" account. When there is a sale, inventory is reduced and COGS is calculated. Inventory quantities are updated continuously. The perpetual inventory system updates inventory accounts after each purchase or sale.
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