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Concept explainers
Perpetual and periodic inventory systems compared
• LO8–1
The following information is available for the Johnson Corporation for 2018:
Beginning inventory | $ 25,000 |
Merchandise purchases (on account) | 155,000 |
Freight charges on purchases (paid in cash) | 10,000 |
Merchandise returned to supplier (for credit) | 12,000 |
Ending inventory | 30,000 |
Sales (on account) | 250,000 |
Cost of merchandise sold | 148,000 |
Required:
Applying both a perpetual and a periodic inventory system, prepare the
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Periodic Inventory System: Under this system, the balance of the merchandise inventory is not adjusted when the purchases and sales takes place, rather it is adjusted at the end of a particular period on a periodic basis.
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
To Prepare: the journal entries for the given transactions under perpetual and periodic inventory system.
Explanation of Solution
Prepare the journal entries for the given transactions under perpetual inventory system.
Purchase:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Inventory | 155,000 | |||
Accounts Payable | 155,000 | |||
(To record the purchase of inventories on account) |
Table (1)
- Inventory is an asset and increased by $155,000. Therefore; debit the inventory account with $155,000.
- Accounts payable is a liability and increased by $155,000. Therefore, credit the accounts payable account with $155,000.
Freight:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Inventory | 10,000 | |||
Cash | 10,000 | |||
(To record the freight cost) |
Table (2)
- Inventory is an asset and increased by $10,000. Therefore; debit the inventory account with $10,000.
- Cash is an asset and increased by $10,000. Therefore, credit the cash account with $10,000.
Purchase Returns:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Accounts Payable | 12,000 | |||
Inventory | 12,000 | |||
(To record the return of inventories on account) |
Table (3)
- Accounts payable is a liability and decreased by $12,000. Therefore, debit the accounts payable account with $12,000.
- Inventory is an asset and increased by $12,000. Therefore, credit the inventory account with $12,000.
Sales:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Accounts Receivable | 250,000 | |||
Sales Revenue | 250,000 | |||
(To record the sales on account) |
Table (4)
- Accounts Receivable is an asset and increased by $250,000. Therefore, debit the accounts receivable account with $250,000.
- Sales Revenue is a revenue that increases the equityby $250,000. Therefore, credit the sales revenue account with $250,000.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Cost of Goods Sold | 148,000 | |||
Inventory | 148,000 | |||
(To record the cost of goods sold) |
Table (5)
- Cost of Goods Sold is an expense that decreases the equity by $148,000. Therefore, credit the cost of goods sold account with $148,000.
- Inventory is an asset and decreased by $148,000. Therefore, creditthe inventory account with $148,000.
Year-end Adjusting Entry:
NO ENTRY IS REQUIRED.
Prepare the journal entries for the given transactions under periodic inventory system.
Purchase:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Purchases | 155,000 | |||
Accounts Payable | 155,000 | |||
(To record the purchase of inventories on account) |
Table (6)
- Purchase is an expense and increased by $155,000which decreased the equity. Therefore, debit the purchase account with $155,000.
- Accounts payable is a liability and increased by $155,000. Therefore, credit the accounts payable account with $155,000.
Freight:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Freight-in | 10,000 | |||
Cash | 10,000 | |||
(To record the freight cost) |
Table (7)
- Freight-in is an expense and increased by $10,000which decreased the equity. Therefore, debit the freight-in account with $10,000.
- Cash is an asset and increased by $10,000. Therefore, credit the cash account with $10,000.
Purchase Returns:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Accounts Payable | 12,000 | |||
Purchase Returns | 12,000 | |||
(To record the return of inventories on account) |
Table (8)
- Accounts payable is a liability and decreased by $12,000. Therefore, debit the accounts payable account with $12,000.
- Purchase returns is a contra-purchase account (with normal credit balance) and increased by $12,000. Therefore, credit the purchase returns account with $12,000.
Sales:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Accounts Receivable | 250,000 | |||
Sales Revenue | 250,000 | |||
(To record the sales on account) |
Table (9)
- Accounts Receivable is an asset and increased by $250,000. Therefore, debit the accounts receivable account with $250,000.
- Sales Revenue is revenue that increases the equity by $250,000. Therefore, credit the sales revenue account with $250,000.
Cost of goods sold:
No entry is required for cost of goods sold under the periodic method.
Prepare the year-end Adjusting Entry.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Cost of Goods Sold | 148,000 | |||
Ending Inventory | 30,000 | |||
Purchase Returns | 12,000 | |||
Beginning Inventory | 25,000 | |||
Purchases | 155,000 | |||
Freight-in | 10,000 | |||
(To record the cost of goods sold) |
Table (10)
- Cost of Goods Sold is an expense that decreases the equity by $148,000. Therefore, credit the cost of goods sold account with $148,000.
- Ending Inventory is an asset and increased by $30,000. Therefore, debit the inventory account with $30,000.
- Purchase returns is a contra-purchase account (with normal credit balance) and decreased by $12,000. Therefore, debit the purchase returns account with $12,000.
- Beginning Inventory is an asset and decreased by $25,000. Therefore, credit the inventory account with $25,000.
- Purchase is an expense and decreased by $155,000 which increased the equity. Therefore, credit the purchase account with $155,000.
- Freight-in is an expense and decreased by $10,000which increased the equity. Therefore, credit the freight-in account with $10,000.
Working note:
Calculate the cost of goods sold.
Particulars | Amount ($) | Amount ($) |
Beginning Inventory | 25,000 | |
Add: Purchases | 155,000 | |
Less: Purchase Returns | (12,000) | |
Net purchases | 153,000 | |
Goods available for sale | 178,000 | |
Less: Ending Inventory | (30,000) | |
Cost of goods sold | 148,000 |
Table (11)
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