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3.3: Basic Merchandising Transactions (Perpetual Inventory System)

  • Page ID
    43071
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    A merchandising business buys product from vendors, marks it up, and sells it to customers.

    Transactions 1 through 3 are for purchases under the perpetual inventory system. The only new account used for purchases is Merchandise Inventory.

    1. You purchase 50 items on account for $10 each.
      Date Account   Debit Credit  
      1 Merchandise Inventory   500   Merchandise Inventory is an asset account that is increasing.
        Accounts Payable     500 Accounts Payable is a liability account that is increasing.
    2. You return 10 of the items to the vendor. Just “flip” over the previous purchase transaction to undo it.
      Date Account   Debit Credit  
      2 Accounts Payable   100   Accounts Payable is a liability account that is decreasing
        Merchandise Inventory     100 Merchandise Inventory is an asset account that is decreasing.
    3. You pay for the purchase, minus the return.
      Date Account   Debit Debit  
      3 Accounts Payable   400   Accounts Payable is a liability account that is decreasing.
        Cash     400 Cash is an asset account that is decreasing.

      Transactions 4 through 8 are for sales under the perpetual inventory system. Any of the new accounts may be used for sales.

      First, at the beginning of the accounting period (such as a year), a merchandising company estimates how much of its sales are likely to be returned during the year. On the first day of the year, the entire anticipated amount of sales returns is recorded in a journal entry. Under the perpetual system, a second entry simultaneously is recorded to estimate the cost of the merchandise returned. These entries attempt to match the sales for the year to the amount of sales returns in the same year. They do not represent an actual return, but instead an estimate of actual returns to come.

    4. a. You estimate sales returns for the year to be $450.
      Date Account   Debit Credit  
      1/1 Sales Returns   450   Sales Returns is a contra revenue account that is increasing.
        Allowance for Sales Returns     450 Allowance for Sales Returns is a contra account that is increasing.

      b. The cost of the estimated sales returns is $300.

      Date Account   Debit Credit  
      1/1 Estimated Inventory Returns   300   Estimated Inventory Returns is an asset account that is increasing.
        Cost of Merchandise Sold     300 Cost of Merchandise Sold is an expense account that is decreasing.

      The following three transactions are used for sales, actual returns, and receipt of payments from customers.

    5. a. You sell 50 items on account for $15 each.
      Date Account   Debit Credit  
      5a Accounts Receivable   750   Accounts Receivable is an asset account that is increasing.
        Sales     750 Sales is a revenue account that is increasing.

      b. You reduce inventory by cost of what was sold.

      Date Account   Debit Credit  
      5b Cost of Merchandise Sold   500   Cost of Merchandise Sold is an expense account that is increasing.
        Merchandise Inventory     500 Merchandise Inventory is an asset account that is decreasing.
    6. a. Your customer returns 10 items to you. The estimated account is reduced since some of the returns have occurred, so less is estimated to occur in the future.
      Date Account   Debit Credit  
      6a Allowance for Sales Returns   150   Allowance for Sales Returns is a contra account that is decreasing.
        Accounts Receivable     150 Accounts Receivable is an asset account that is decreasing.

      b. You increase inventory by cost of returned items.

      Date Account   Debit Credit  
      6b Merchandise Inventory   100   Merchandise Inventory is an asset account that is increasing.
        Estimated Inventory Returns     100 Cost of Merchandise Sold is an expense account that is decreasing.
    7. You receive payment for the sale, minus the return.
      Date Account   Debit Credit  
      7 Cash   600   Cash is an asset account that is increasing.
        Accounts Receivable       Accounts Receivable is an asset account that is decreasing.

      3.3.1 Merchandising Transactions (perpetual inventory system) with Discounts – The Buyer

      Discounts are reductions in the purchase price of merchandise that a seller may offer to encourage the buyer to pay invoices off early. If the buyer pays within a designated time period, he/she will pay less than the full purchase price to satisfy the full invoice amount.

      Only consider the discount when cash is actually paid by the purchaser. Before that, at the time of the purchase, neither party may be certain whether payment will be made within the discount period or not.

      The amount of discount allowed is stated on the invoice using the following terminology:

      • Net 30 means the entire amount of the invoice is due in 30 days and no discount is allowed for early payment
      • 2/10, net 30 means the purchaser may take a 2% discount on the
        cost of the merchandise if he pays within 10 days; otherwise, the entire amount of the invoice is due in 30 days. Other numbers may appear for the “2” and “10” to indicate a different percentage and/or a different number of days to qualify for the discount (such as 1/15 - 1% discount if paid within 15 days).

      Transactions 8 and 9 are for purchases of product that will be resold. Merchandise Inventory is the account used to record the discount for the purchaser under the perpetual inventory system. It is credited to reduce the original debit by the amount of the discount, so ultimately the inventory is valued at the amount of cash paid for it.

    8. You purchase 50 items on account for $10 each, 2/10 net 30.
      Date Account   Debit Credit  
      8 Merchandise Inventory   500   Merchandise Inventory is an asset account that is increasing.
        Accounts Payable     500 Accounts Payable is a liability account that is increasing.
    9. You pay for the purchase, taking the discount.
      Date Account   Debit Credit  
      9 Accounts Payable   500   ▼ Accounts Payable is a liability account that is decreasing.
        Cash     490 Cash is an asset account that is decreasing.
        Merchandise Inventory     10 Merchandise Inventory is an asset account that is decreasing.

      When the inventory was purchased, it was recorded at full price of $500, without the discount. Later, at the time of payment, the buyer decided to take the $10 discount ($500 x 2%). The inventory account is reduced by $10 to recognize that the actual value of the inventory in the ledger is $490 – the amount of cash paid for it.

      3.3.2 Merchandising Transactions (perpetual inventory system) with Discounts – The Seller

      There are two methods for recording sales transactions when the seller offers its customer a discount to pay early. The choice depends on when the seller expects the buyer to pay. If the seller expects the buyer to pay the full amount after the discount period has expired, the gross method is typically used and the sale is recorded at the full amount. If the seller expects the buyer to pay the reduced amount within the discount period, the net method is usually selected and the sale is recorded at the selling price minus the discount amount. The goal is to best match revenue to the period in which it is earned.

      In the examples that follow, the sale under the gross method is recorded at the full amount of $750. The sale under the net method is recorded at that amount minus the discount, or $735.

      The amount for the entry to reduce the inventory and increase cost of goods sold is the same for both methods.

    10. GROSS METHOD NET METHOD
      a. You sell 50 items on account for $15 each, 2/10 net 30. a. You sell 50 items on account for $15 each, 2/10 net 30.
      Account Debit Credit Account Debit Credit
      ▲ Accounts Receivable 750   ▲ Accounts Receivable 735  
      ▲ Sales   750 ▲ Sales   735
      Accounts Receivable is an asset account that is increasing. Accounts Receivable is an asset account that is increasing.
      Sales is a revenue account that is increasing. 50 x $15 = 750

      Sales is a revenue account that is increasing.

      (50 x $15) – ((50 x $15) x .02) = 735

      b. You reduce inventory by the cost of what was sold. Each item cost $10. b. You reduce inventory by the cost of what was sold. Each item cost $10.
      Account Debit Credit Account Debit Credit
      ▲ Cost of Merchandise Sold 500   ▲ Cost of Merchandise Sold 500  
      ▼ Merchandise Inventory   500 ▼ Merchandise Inventory   500
      Cost of Merchandise Sold is an expense account that is increasing. Cost of Merchandise Sold is an expense account that is increasing.
      Merchandise Inventory is an asset account that is decreasing. Merchandise Inventory is an asset account that is decreasing.
    11. You receive full payment for the sale AFTER the discount period, which is what you had anticipated. You receive reduced payment for the sale WITHIN the discount period, which is what you had anticipated.
      Account Debit Credit Account Debit Credit
      ▲ Cash 750   ▲ Cash 735  
      ▼ Accounts Receivable   750 ▼ Accounts Receivable   735
      Cash is an asset account that is increasing. Cash is an asset account that is increasing.
      Accounts Receivable is an asset account that is decreasing. Accounts Receivable is an asset account that is decreasing.

      OR, if payment is ultimately received at a time other than expected:

    12. You receive payment for the sale WITHIN the discount period, although you had recorded the sale at the full amount. You receive payment for the sale AFTER the discount period, although you had recorded the sale at the discounted amount.
      Account Debit Credit Account Debit Credit
      ▲ Cash 735   ▲ Cash 750  
      ▲ Sales Discounts 15   ▲ Sales Discounts Not Taken   50
      ▼ Accounts Receivable   750 ▼ Accounts Receivable   735
      Cash is an asset account that is increasing. Cash is an asset account that is increasing.
      Sales Discounts is a contra revenue account that is increasing. Sales Discounts Not Taken is increasing.
      Accounts Receivable is an asset account that is decreasing. Accounts Receivable is an asset account that is decreasing.

      Sales Discounts is a contra revenue account that may be used under the gross method when a customer pays within the discount period after the sale had been recorded at full price.

      Sales Discounts Not Taken is a contra revenue account that may be used under the net method when a customer does not pay within the discount period after the sale had been recorded at the discounted price.

      Both of these contra accounts substitute for the Sales revenue account.

      If a return were involved, the customer would not take the discount on the amount that was returned under the gross method, but would under the net method.


    This page titled 3.3: Basic Merchandising Transactions (Perpetual Inventory System) is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.