BASIC STRUCTURE FOR MERCHANDISE INVENTORY ENTRIES

Journal Entry Under a Perpetual Inventory System

Transactions Daily Recurring Entries Dr. Cr.

Selling merchandise to customers. Cash or Accounts Receivable XX
Sales Revenue XX
Cost of Goods Sold XX
Merchandise Inventory XX
Granting sales returns or allowances Sales Returns and Allowances XX
to customers. Cash or Accounts Receivable XX
Sales
Merchandise Inventory XX
Transactions
Cost of Goods Sold XX
Paying freight costs on sales; FOB Freight-out XX
destination. Cash XX
Receiving payment from customers Cash XX
within discount period. Sales Discounts XX
Accounts Receivable XX
Purchasing merchandise for resale. Merchandise Inventory XX
Cash or Accounts Payable XX
Paying freight costs on merchandise Merchandise Inventory XX
purchased; FOB shipping point. Cash XX
Purchase
Transactions Receiving purchase returns or Cash or Accounts Payable XX
allowances from suppliers. Merchandise Inventory XX
Paying suppliers within discount period. Accounts Payable XX
Merchandise Inventory XX
Cash XX

Events Adjusting and Closing Entries

Adjust because book amount is higher Cost of Goods Sold XX
than the inventory amount Merchandise Inventory XX
determined to be on hand.
Closing temporary accounts with credit Sales Revenue XX
balances. Income Summary XX
Closing temporary accounts with debit Income Summary XX
balances. Sales Returns and Allowances XX
Sales Discounts XX
Cost of Goods Sold XX
Freight-out XX
Expenses XX

Cost of Goods Sold Under a Periodic Inventory System

Beginning Inventory
+ Cost of Goods Purchased
Cost of Goods Available for Sale
- Ending Inventory
Cost of Goods Sold
COMPARISON OF ENTRIES—PERPETUAL VS. PERIODIC

On May 4, Sauk Stereo purchases merchandise from PW Audio Supply for $3,800 (FOB- shipping point)
with the condition of 2/10, n/30. Sauk Stereo pays Acme Freight Company $150 for freight charges on its
purchase from PW Audio Supply on May 6. Sauk Stereo returns $300 of goods to PW Audio Supply on
May 8. On May 14, Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2%
cash discount allowed by PW Audio Supply for payment within 10 days.

Entries on Sauk Stereo’s Books

Transaction Perpetual Inventory System Periodic Inventory System
May 4 Purchase of Inventory 3,800 Purchases 3,800
merchandise on credit. Accounts Payable 3,800 Accounts Payable 3,800
6 Freight costs on Inventory 150 Freight-in 150
purchases. Cash 150 Cash 150
8 Purchase returns and Accounts Payable 300 Accounts Payable 300
allowances. Inventory 300 Purchase Returns
and Allowances 30 0
14 Payment on account Accounts Payable 3,500 Accounts Payable 3,500
with a discount. Apago
Cash PDF Enhancer3,430 Cash 3,430
Inventory 70 Purchase Discounts 70
Entries on PW Audio Supply’s Books
Transaction Perpetual Inventory System Periodic Inventory System
May 4 Sale of merchandise on Accounts Receivable 3,80 0 Accounts Receivable 3,80 0
credit. Sales Revenue 3,800 Sales Revenue 3,800
Cost of Goods Sold 2,400 No entry for cost of
Inventory 2,400 goods sold
8 Return of merchandise Sales Returns and Sales Returns and
sold. Allowances 300 Allowances 300
Accounts Receivable 30 0 Accounts Receivable 30 0
Inventory 140 No entry
Cost of Goods Sold 140
14 Cash received on Cash 3,430 Cash 3,430
account with a discount. Sales Discounts 70 Sales Discounts 70
Accounts Receivable 3,50 0 Accounts Receivable 3,50 0
Ex. - 1 J. Hafner, a former professional tennis star, operates Hafner’s Tennis Shop at the Miller
Lake Resort. At the beginning of the current season, the ledger of Hafner’s Tennis Shop showed
Cash $2,500, Merchandise Inventory $1,700, and J. Hafner, Capital $4,200. The following transac-
tions were completed during April.

Apr. 4 Purchased racquets and balls from Wellman Co. $840, FOB shipping point, terms 2/10,
n/30.
6 Paid freight on purchase from Wellman Co. $40.
8 Sold merchandise to members $1,150, terms n/30. The merchandise sold had a cost of
$790.
10 Received credit of $40 from Wellman Co. for a racquet that was returned.
11 Purchased tennis shoes from Venus Sports for cash, $420.
13 Paid Wellman Co. in full.
14 Purchased tennis shirts and shorts from Serena’s Sportswear $900, FOB shipping
point, terms 3/10, n/60.
15 Received cash refund of $50 from Venus Sports for damaged merchandise that was
returned.
17 Paid freight on Serena’s Sportswear purchase $30.
18 Sold merchandise to members $810, terms n/30. The cost of the merchandise sold was
$530.
20 Received $500 in cash from members in settlement of their accounts.
21 Paid Serena’s Sportswear in full.
27 Granted an allowance of $30 to members for tennis clothing that did not fit properly.
30 Received cash payments on account from members, $660.

Journalize the April transactions using a perpetual inventory system.

Ex. - 2 At the beginning of the current season, the ledger of Village Tennis Shop showed Cash
$2,500; Merchandise Inventory $1,700; and Angie Wilbert, Capital $4,200. The following transac-
tions were completed during April.
Apr. 4 Purchased racquets and balls from Denton Co. $740, terms 3/10, n/30.
6 Paid freight on Denton Co. purchase $60.
8 Sold merchandise to members $900, terms n/30.
10 Received credit of $40 from Denton Co. for a racquet that was returned.
11 Purchased tennis shoes from Newbee Sports for cash $300.
13 Paid Denton Co. in full.
14 Purchased tennis shirts and shorts from Venus’s Sportswear $600, terms 2/10, n/60.
15 Received cash refund of $50 from Newbee Sports for damaged merchandise that was
returned.
17 Paid freight on Venus’s Sportswear purchase $30.
18 Sold merchandise to members $1,000, terms n/30.
20 Received $500 in cash from members in settlement of their accounts.
21 Paid Venus’s Sportswear in full.
27 Granted an allowance of $30 to members for tennis clothing that did not fit properly.
30 Received cash payments on account from members $500.

Journalize the April transactions using a periodic inventory system.

Ex. - 3 Kristen Montana operates a retail clothing operation. She purchases all merchandise in-
ventory on credit and uses a periodic inventory system. The accounts payable account is used for
recording inventory purchases only;all other current liabilities are accrued in separate accounts.You
are provided with the following selected information for the fiscal years 2007, 2008,2009, and 2010.
2007 2008 2009 2010
Inventory (ending) $ 13,000 $ 11,300 $ 14,700 $ 12,200
Accounts payable (ending) 20,000
Sales 225,700 227,600 219,500
Purchases of merchandise
inventory on account 146,000 145,000 129,000
Cash payments to suppliers 135,000 161,000 127,000
Instructions
(a) Calculate cost of goods sold for each of the 2008, 2009, and 2010 fiscal years .
(b) Calculate the gross profit for each of the 2008, 2009, and 2010 fiscal years .
(c) Calculate the ending balance of accounts payable for each of the 2008, 2009, and 2010 fiscal years.
(d) Sales declined in fiscal 2010. Does that mean that profitability, as measured by the gross
profit rate, necessarily also declined? Explain, calculating the gross profit rate for each fiscal
year to help support your answer . (Round to one decimal place .)
Ex. - 4 Paul’s Book Warehouse distributes hardcover books to retail stores and extends credit
terms of 2/10, n/30 to all of its customers. At the end of May, Paul’s inventory consisted of books
purchased for $1,800. During June the following merchandising transactions occurred.

June 1 Purchased books on account for $1,200 from Logan Publishers , FOB destination,
terms 2/10, n/30. The appropriate party also made a cash payment of $50 for the freight
on this date.
3 Sold books on account to Reading Rainbow for $2,400. Purchasing value was $1,440.
6 Received $100 credit for books returned to Logan Publishers.
9 Paid Logan Publishers in full, less discount.
15 Received payment in full from Reading Rainbow.
17 Sold books on account to Cheap Books for $1,800. The cost of the books sold was $1,080.
20 Purchased books on account for $1,500 from Phantom Publishers, FOB destination,
terms 2/15, n/30. The appropriate party also made a cash payment of $50 for the freight
on this date.
24 Received payment in full from Cheap Books.
26 Paid Phantom Publishers in full, less discount.
28 Sold books on account to Willow Bookstore for $1,300.The cost of the books sold was
$780.
30 Granted Willow Bookstore $120 credit for books returned costing $72.

Journalize the transactions for the month of June for Paul’s Book Warehouse using a perpetual
inventory system.

Ex. - 5 Newman Hardware Store completed the following merchandising transactions in the
month of May . At the beginning of May , the ledger of Newman showed Cash of $5,000 and
Newman, Capital of $5,000.
May 1 Purchased merchandise on account from Jerry’s Wholesale Supply $4,200,terms 2/10, n/30.
2 Sold merchandise on account $2,100,terms 1/10, n/30. The cost of the merchandise sold
was $1,300.
5 Received credit from Jerry’s Wholesale Supply for merchandise returned $300.
9 Received collections in full, less discounts , from customers billed on sales of $2,100
on May 2.
10 Paid Jerry’s Wholesale Supply in full, less discount.
11 Purchased supplies for cash $400.
12 Purchased merchandise for cash $1,400.
15 Received refund for poor quality merchandise from supplier on cash purchase $150.
17 Purchased merchandise from Cosmo Distributors $1,300, FOB shipping point, terms
2/10, n/30.
19 Paid freight on May 17 purchase $130.
24 Sold merchandise for cash $3,200. The merchandise sold had a cost of $2,000.
25 Purchased merchandise from Costanza, Inc. $550, FOB destination, terms 2/10, n/30.
27 Paid Cosmo Distributors in full, less discount.
29 Made refunds to cash customers for defective merchandise $60. The returned mer-
chandise had a scrap value of $10.
31 Sold merchandise on account $900, terms n/30. The cost of the merchandise sold was $560.

Journalize the transactions using a perpetual inventory system.

 $ 78,000 $ 86,000 $ 88,000
( × 100) ( × 100) ( × 100)
$ 225,700 $ 227,600 $ 219,500