Chapter 7
Inventory: Merchandising Transactions
175
the Perpetual Inventory system
A perpetual inventory system involves recording all transactions affecting the balance of inventory
on hand, as they occur. In reality, most businesses have separate, detailed records for each type
of product they sell. For simplicity, our examples will focus on one type of product, where all
transactions affect a single inventory account directly.
We will demonstrate various inventory-related transactions using an example of a retail store called
Tools 4U, which buys and sells various tools.Tools 4U is a proprietorship owned byWayne Sanders.
Purchase and sale of Inventory
When inventory is purchased for resale using a perpetual inventory system, the inventory account
is debited and the cash or the accounts payable account is credited. Tools 4U purchased inventory
at a cost of $10,000 on January 1, 2016. Assume all purchases and sales are made on account.
Figure 7.5 shows how this purchase is journalized.
Journal
Page 1
date
account title and explanation
debit Credit
2016
Jan 1 Inventory
10,000
Accounts Payable
10,000
Purchased inventory on account
________________
fIGuRe 7.5
Tools 4U adds this purchase to the inventory it already has on hand that is ready to sell. Suppose
inventory worth $7,200 is sold for $15,000 on January 15 on account. The sale of inventory is
recorded by using two journal entries
1. Debit accounts receivable and credit sales revenue each for $15,000 to show the sale on
account.This records the proceeds from the sale. If the sale was made for cash, then the cash
account would be debited instead of accounts receivable.
2. Debit COGS and credit inventory each for $7,200 to show that inventory has been reduced.
This entry is necessary because it removes the inventory sold from the balance sheet and
records its cost on the income statement as a cost of doing business for the period.
These transactions are shown in Figure 7.6. Note that the gross profit generated by this sale is equal
to $7,800 ($15,000 − $7,200).
