merchandise inventory accounting

Group Member HamzaKabishaMehmoonaZareen

Merchandise Inventory

Merchandise inventory is the goods owned by the business organization which are held for sale to the consumers

Goods held for sale to customers

Merchandise Inventory?

Understanding and journalizing transactions using the perpetual and periodic inventory system and explaining the difference between perpetual and periodic inventory systems

Use the gross profit percentage and inventory turnover to evaluate a business

Estimate inventory by the gross profit method

Objectives

Merchandise inventory cash

To record purchased of Goods with cash

Merchandise inventory accounts payable

To record purchased of goods on account

Purchasing TransactionCash Accounts Payable

Accounts Payable cashmerchandise inventory to record purchases return

accounts payable merchandise inventory

to record purchases return

Purchase ReturnCash

It is an term that indicates when the ownership of Merchandise/Goods is transfer from the seller to the buyer.

FOB Shipping Point FOB Destination

FOB(FREE ON BOARD)

Buyer of the Merchandise/ Goods Pays the transportation cost.

The cost is added in merchandise inventory.

Seller of the Merchandise/ Goods pays the transportation cost.

The cost is recorded as a “Delivery Expense/Cost” separately.

Transportation CostFOB

Sipping pointFOB

Destination

InventoryAccounting

Method

PerpetualMethod

Periodic/PhysicalMethod

Method’s

A system that maintain a running record to show the inventory on hand at all time.

Merchandise inventory and cost of merchandise sold accounts are updated on continuous basis.

Inventory counted at least once a year. Used for all types of goods.

Perpetual Inventory System

FIFO(First-In First-Out) Method LIFO(Last-In-First-Out) Method Average Cost Method

Inventory CostingUnder perpetual IS

Using FIFO cost are included in the merchandise sold in the order in which they are incurred.

First-In First-Out Method

60 units Less units sold 40 Ending inventory 20 units

20 units × $18 per unit = $360

First-In First-Out Method

DATE PURCHASE SELLING BALANCE

Unit Price/unit

Total Unit Price/unit

Total Unit Price/unit

Total

January 1st 600 4500 2700000

January 10th 200 4700 940000 600 4500 2700000

200 4700 940000

January 15th 400 4500 1800000 200 4500 900000

200 4700 940000

January 28th 200 4500 900000 - - -

100 4700 940000 100 4700 470000

Using LIFO the cost of units sold is the cost of the most recent purchases.

Last-In First-Out Method

60 units Less units sold 40 Ending inventory 20 units

10 units × 10 =$10010 units × 14 = 140Total $240

Last-In First-Out MethodDATE PURCHASE SELLING BALANCE

Unit Price/unit

Total Unit Price/unit

Total Unit Price/unit

Total

January 1st 600 4500 2700000

January 10th 200 4700 940000 200 4700 940000

600 4500 2700000

January 15th 200 4700 940000 400 4500 180000

200 4500 2700000 100 4500 450000

January 28th 300 4500 1350000 - - -

Average Costper unit =

Cost of Goods Available

Number of units available

Average Costing

Usually falls between FIFO & LIFO amounts

An average unit cost for each type of item is computed each time when a purchase is made

DATE PURCHASE SELLING BALANCE

Unit Price/unit

Total Unit Price/unit

Total Unit Price/unit

Total

January 1st 600 4500 2700000

January 10th 200 4700 940000 800 4550 3640000

January 15th 400 4550 1820000 400 4550 1820000

January 28th 300 4550 1365000 - - -

AVERAGE COST

Other3%

Average20%

LIFO31% FIFO

46%

Use Of The VariousInventory Methods

A system that do not keep a continuous records of inventory on hand all the time.

Merchandise inventory and cost of merchandise sold accounts are usually updated at the end of year.

Inventory counted at least once a year. Used for inexpensive goods.

Periodic Inventory System

DifferencePerpetual

Merchandise Inventory Cash Or A/P Sales Return &

Allowance Sales Discount Cost Of Merchandise

Sold

Periodic Purchases Cash Or A/P Sales Return &

Allowance Sales Discount Cost Of

Merchandise Sold

Purchase of Goods

Return of Purchase

INVENTORY SYSTEM

PerpetualMerchandise inventory Cash or A/P

Cash or A/P Merchandise inventory

PeriodicPurchases Cash or A/P

Cash or A/PPurchase Return

Event

Perpetual Periodic Payment

Of Accounts Payable

Collection Of Accounts Receivable

Payment Of Accounts Payable On Discount

EventAccounts Payable

Cash

CashAccounts Receivable

Accounts PayableCash

Merchandise Inventory

Accounts Payable Cash

Cash A/R

A/PCash

Purchase Discount

Perpetual Periodic Collection

Of Accounts Receivable On Discount

Year End Adjusting Entries

EventCashSales DiscountAccount Receivable

CMSMerchandise Inventory

In Case Of Shrinkage Inventory

CashSales Discount A/R

CMS(B) Merchandise Inventory Purchase(C) Merchandise Inventory CMS

Merchandise Inventory(B)+Purchases-Cost Of Merchandise

Available For Sale-Merchandise Inventory(C)-Cost Of Merchandise Sold

Gross profit method is a way to estimate inventory based on the cost of goods sold model.

Also called gross margin method.

Gross Profit Method

Cost of goods sold:Beginning inventory $1,000+ Purchases 6,000= Goods available 7,000- Cost of goods sold (5,000)= Ending inventory $2,000

Gross Profit Method

Beginning inventory $14,000Purchases 66,000Goods available 80,000Cost of goods sold:

Net sales revenue $100,000Less estimated gross profit 43% (43,000)Estimated cost of goods sold 57,000

Estimated cost of ending inventory $23,000

Gross Profit Method

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