Journalizing Using a Perpetual Inventory System - YouTube

This video is on journalizing using a perpetual inventory system, please pause

the video and make sure you have a piece of paper so that we may record the

journal entries together on the books of

the purchaser and the seller. Okay let's read the directions, journalize the following transactions

on the book of the purchaser and seller assuming they both use a perpetual

inventory system. On October 2nd Costco, Inc. sold merchandise to MSK, Inc. for $470,

terms to 2/10, n/30 - FOB destination (Inventory sold cost Costco $200), so what

we're gonna do is determine who is the purchaser and who is the seller.

Now if Costco sold merchandise to MSK, then MSK, Inc. would be the purchaser and Costco

would be the seller. So let's go ahead and set up your paper accordingly and I'm gonna go

ahead move this down a little bit so that we can see. Alrighty, so on the purchaser's books

we're gonna go ahead and put the date, October 2nd and the accounts we're going

to use we're gonna do a debit to inventory and the amount of the purchase 470 and

of course we've got to credit an account and we will credit ... let's see ... accounts payable and how we

know it is accounts payable and not cash is because we're given terms 2/10, n/30

those terms were discussed in the chapter and that basically means a 2% discount

if payed within 10 days, if not then the net amount, whatever amount we have left

that we owe the

vendor we need to pay in full by thirty days from the date of purchase which was

October 2nd. So this is what the journal entry would look like on the purchaser's

books. Debit to inventory credit to accounts payable 470 and 470. The next thing is we're

gonna skip space and read the information for the second transaction.

Okay, appropriate party paid shipping costs $30 to UPS to ship inventory to

purchaser. So appropriate party pay, so that will be for October 2nd and the

shipping terms are FOB destination, as discussed in your textbook, FOB stands

for free on board

destination. So what that means is it is the responsibility of the seller until

it gets to the final destination which is the receiving docks of the

purchaser's location. So in that case a seller would be responsible for paying

the shipping charges. So on the purchaser's books there would be no

entry. Now if the terms are in fact FOB shipping point then if those were the

terms in you would actually have a journal entry and the purchaser would

actually be responsible for paying the shipping charges. If that were the case

you would debit inventory, for the costs and you go ahead and pass that along to the cost

of the inventory and then you would credit cash for the amount paid to UPS

for whatever amount it ends up being. But that is only if it is FOB shipping point, now since it's

not, let's go ahead and erase that and return it back no entry and the reason being

is FOB destination or you can simply leave it blank since there's no journal entry. Ok the

next one. Let's see what we have for the next one. On October 4 we have MSK, Inc

returns $70 in inventory to Costco. Now that is one thing I like about Costco, they allow

returns. So here we are returning something, 70 bucks and the inventory was not

defective and Costco will resell it to another customer. Costco's original

cost for the returned merchandise at $50 so using that information in preparing

the proper journal entry we're going to go with October 4th and because it's a

return we are going to decrease our accounts payable. And that will be . . . What,

how much did it costs us? Return was $70 and we will credit our inventory since we are returning it

we no longer have it in inventory, so this would be the entry we would put down in the purchaser's books and

our next entry will be October 12th and on this date October 12th MSK, Inc took

advantage of the discount and remitted the amount owed to Costco so keep in

mind we

acquired this inventory on the second and we are a paying in full the amount

that we owe. Well because the 12th is 10 days from the date of the invoice we're

entitled to the discount, so even though we're looking at the balance that we owe

and accounts payable. Now how much is our current balance on this date?

Well if we bought it for $470 on account,

on the second, turned around and did a return, we're looking at $400 as what we owe, so 470 minus the 70 and

then when we look at the amount that we're actually going to pay, so we're gonna

credit cash, this will be our payment in cash, it will be the amount that we owe minus 2%, so if you were to take

98% times the 400, we're actually paying out 392, and that different of eight which is

2% of transfers, translates into multiplication times the 400, that's where

we get the $8, that represents the discount and that discount is going to be a reduction in our

cost of inventory, so this is what it's going to look like so we're basically

just taking the 470 minus the 70, subtract 2% of the 400 to give us at 392.

That's what we would do in terms of the purchaser's books. So now we're ready to do

the journal entries on the seller's books, so were going to use that same information

that we used earlier, so going back to October 2nd, the day that Costco made the sale, now on Costco's books the day

they make the sale it's going to be on account as well, don't forget the term, we have

accounts receivable, so accounts receivable and we're charging our customer $470

and that would be a sale to us so we're going to use sales revenues, you can also use

just sells, it depends on the chart of account for the company, now that's only

part of the journal entry, under the revenue recognition principle cause

title is transferring we want to go ahead and recognize the sale at that point in

time and actually officially it would be when they actually received because

the terms are.

FLB destination

title transfers and we also want to recognize the expense that relates to this 470.

So if we look here it says inventory sold cost Costco $200, so that means our cost

of goods sold is going to be $200 and $200 is coming out of our inventory since that was our

inventory costs of the items that are being so both of these entries will

be done on October 2nd then we go down to the second, appropriate party paid

shipping cost of $30, because the terms are FLB destination it will look like this on the

seller's books they are making the payment,

10/2 and we will charge it to the the expense account freIght-out

because we are the seller and this is a cost to get it out, it is a selling

expense and that was $30 and since we paid it, you can assume we

credit cash and again is no entry on the books of the buyers because this seller

is taking care of it based on the current terms, now the next date we have

10/4 was a return and this return we're going to put it back into

inventory because it's not defective, let's read the item again, MSK, Inc

returned 70 dollars in inventory to Costco, the inventory was not defective and

Costco will resell it to another customer, so Costco's original cost for

this 70 dollars in return merchandise was $50. So we're going to have to do two journal entries

similar to what we did

up here and again we're doing this because we're using a perpetual

inventory system so we will debit sales returns and allowances

and this is a contra-revenue account, normal balance is debit it offsets sales and we'll go

ahead and put the 70 here and 70 here and we will credit accounts receivables. Now some

of you may ask well why not debit sales? Well a lot of companies like to

keep track of their sales and returns in a separate account so they can

do better planning the future and identify if there's an issue with their

inventory that they're selling to their customers. So we're going to do the second part, this also

will occur exactly at the same time so it's going to be the same date

and we're going to put it back in the inventory because it's not defective, and we'll go

ahead and look at our original cost for these items which is $50 and so this

inventory right here we're going to go ahead and credit, Costs Of Good Soul and

I'm gonna use COGS, C.O.G.S. for short and we'll put it back into our inventory and just a

side note if we were allowing them to keep the inventory in and lets say we just

gave them an allowance then there would be no need for the second entry, in

addition if it's defective then you would have to figure out the actual value and

then write it down and use a lesser amount if it's a smaller scrap value.

Or if it's no good then you wouldn't even do any journal entry recordings. So the next

thing we have, let's see... is on the 12th, and again

MSK took advantage of the discount and remitted the amount owed to Costco.

Now we already did the calculations earlier over here so you see that it has a 392 so

your assumption over here on the 12th, they received the cash in the amount of 392,

the difference of eight is gonna go to another contra-revenue account which is

sales discount and then we have the total, these to, settling the full

account debts; so accounts recievable; and that amount

is 400. And that is how you do the journal entries for a purchaser or a

seller under a perpetual inventory system. Any questions on the solution

please post your questions in discussion forum.