218
In Summary
Record journal entries related to inventory purchases under the periodic inventory system
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When buying inventory, the purchases account is debited.
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When returning inventory or taking an allowance on purchased goods, the contra-expense
account called purchase returns and allowances is credited.
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When discounts are taken advantage of on inventory purchases, the contra-expense account
called purchase discounts is credited for the amount of the discount.
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Shipping costs paid on goods purchased FOB shipping point are recorded in the freight-in
account.
Record journal entries related to inventory sales under the periodic inventory system
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When selling inventory, only the sales transaction is recorded.The inventory is not removed
from the balance sheet at the time of sale.
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When customers return goods or take allowances on their purchases, the contra-revenue
account called sales returns and allowances is debited.
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Sales discounts allow customers to save money by paying early. This causes a debit to the
contra-revenue account called sales discounts.
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Shipping costs paid on goods sold FOB destination are recorded in the freight-out account.
Calculate cost of goods sold under the periodic inventory system
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Cost of goods sold appears as a separate section below net sales on the multistep income
statement.The beginning inventory balance is listed first in this section.
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Net purchases are calculated next by deducting purchase returns and allowances and purchase
discounts from the purchases account.
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Beginning inventory plus net purchases is called cost of goods available for sale.
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The ending inventory balance (determined by an inventory count) is deducted from the cost
of goods available for sale to calculate the cost of goods sold for the period.
Prepare closing entries for a merchandising business under the periodic inventory system
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All revenue and contra-expense accounts are closed to the income summary account. The
balance of ending inventory is also added to the income summary account in this entry.
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All expense and contra-revenue accounts are closed to the income summary account. The
balance of beginning inventory is also removed from the income summary account in this entry.
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The income summary is closed to the owner’s capital account.
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If there are owner’s drawings, they are closed directly to the owner’s capital account.
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Inventory: Merchandising Transactions
Chapter 7
Appendix
