1. Inventory Systems Review of Inventory Systems Perpetual Inventory System Periodic Inventory System

2. Accounting Cycle (Page 1 of 3) n Transactions occur n Documents are created n Journalize the documents n Post from journals to general ledger (GL) and/or subsidiary ledgers n Prepare working trial balance-unadjusted trial balance from general ledger

3. Accounting Cycle (Page 2 of 3) n Develop adjusting journal entries (AJEs) n Enter AJEs on working trial balance n Extend working trial balance to derive adjusted trial balance n Complete working trial balance u Income statement columns u Balance sheet columns n Prepare financial statements

4. Accounting Cycle (Page 3 of 3) n Journalize AJEs in general journal n Post AJEs from general journal to ledgers n Journalize closing journal entries (CJEs) in general journal n Post CJEs from general journal to ledgers n Prepare post-closing trial balance

5. Inventory Systems n Perpetual Inventory System u Balance sheet balance is always correct u Cost of goods sold account in GL n Periodic Inventory System u Balance sheet reflects beginning inventory u Multiple purchase related accounts in the GL

6. Perpetual Inventory System Journal Entries (Page 1 of 3) n Purchases of inventory are recorded in the merchandise inventory account (ASSET) n Transportation costs on merchandise purchased are recorded in the merchandise inventory account

7. Perpetual Inventory System Journal Entries (Page 2 of 3) n All returns of inventory and reductions in purchase price due to discounts are recorded as deductions to the merchandise inventory account n Whenever a sale is made, TWO JOURNAL ENTRIES are needed. u To record the Sale u To record Cost of Merchandise Sold

8. Perpetual Inventory System Journal Entries (Page 3 of 3) n Whenever a customer returns merchandise, TWO JOURNAL ENTRIES must be made u To record Sales Returns and Allowances u To record reduce Cost of Merchandise Sold

9. Income Statement n Revenue from Sales: u Sales u Less: Sales Returns & Allowances u Less: Sales Discounts u Net Sales n Cost of Merchandise Sold n Gross Profit

10. Periodic Inventory System Journal Entries (Page 1 of 3) n The Merchandise Inventory Account reflects the beginning balance all year n Purchases of merchandise inventory are debited to the Purchases account n Sales of merchandise inventory are recorded with ONE JOURNAL ENTRY u To record the sale of merchandise u No entry to record the cost of merchandise sold

11. Periodic Inventory System Journal Entries (Page 2 of 3) n The Merchandise Inventory account in the GL is beginning inventory all year n There is no Cost of Merchandise Sold n Merchandise general ledger accounts: u Purchases u Purchase returns and allowances u Purchase discounts u Transportation in

12. Periodic Inventory System Journal Entries (Page 3 of 3) n At year end u Inventory is counted u Merchandise Inventory account is: F credited to remove old balance F debited to record new balance u The off setting entries are posted to Income Summary account n Multi-Step Income Statement

13. Income Statement n Revenue from Sales: u Sales u Less: Sales Returns & Allowances u Less: Sales Discounts u Net Sales n Cost of Merchandise Sold* n Gross Profit n * For Periodic Inventory System see next slide

14. Income Statement: Cost of Merchandise Sold Periodic Inventory System n Cost of Merchandise Sold: u Beginning Merchandise Inventory u Plus: Cost of Merchandise Purchased: PurchasesPurchases Less: Purchase Returns & AllowancesLess: Purchase Returns & Allowances Less: Purchase DiscountsLess: Purchase Discounts Net PurchasesNet Purchases Plus Transportation InPlus Transportation In F Cost of Merchandise Purchased u Merchandise Available for Sale u Less: Ending Merchandise Inventory u COST OF MERCHANDISE SOLD