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Bookkeeping!
Merchandise Inventory
by Bean Counter's Dave Marshall

Lesson 5
Accounting For Inventory


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter
Lesson 1 introduced us to the Perpetual and Periodic Inventory Methods and the records needed and used. The intent of this lesson is to provide additional explanation and clarification by using detailed illustrations.

Summary Of Accounting/Bookkeeping Entries
For The Perpetual and Periodic Inventory Methods

Transaction Type Periodic Method Perpetual Method
Purchase Of Products Debit Purchases Account Debit Inventory Control Account
Sale Of Product Debit Cash/Accounts Receivable Account
Credit Sales Account
Credit Sales Tax Payable Account

No Entry Made To Record
Cost Of Goods Sold
and Reduce Inventory Value

Debit Cash/Accounts Receivable Account
Credit Sales Account
Credit Sales Tax Payable Account

Debit Cost Of Goods Sold
Credit Inventory Control Account

Adjusting Entries Debit Inventory Account
Credit Purchases Account

Debit Cost Of Goods Sold Account
Credit Inventory Account

No Adjusting Entries Needed
To Record Cost Of Goods Sold
and Adjust Ending Inventory

Quick Refresher

Flow of Information Thru The Bookkeeping Records

Source Documents

provides the initial data about business transactions. Checks, Invoices to Customers, and Invoices from Suppliers are some common examples of source documents.

Special Journals
Cash Receipts, Cash Disbursements, Sales
Purchases, Payroll, General Journal, etc.

use the information from the source documents to create a chronological listing of all business transactions and detailed information about each transaction.

General Ledger

uses the summarized information transferred from the journal(s) to summarize the data into individual accounts.

Subsidiary Ledgers

uses the detailed information transferred from the journal(s) to provide detailed information about special accounts called Control Accounts.

Trial Balance & Worksheets

uses the information from the General Ledger to summarize the data to use for preparing the Financial Statements.

Financial Statements

uses the summarized data contained in the Trial Balance to prepare the business's financial reports .

A Control Account is a general ledger account that provides a summarized balance of the detailed balances of the individual records maintained in a subsidiary ledger. Subsidiary Ledgers provide the detail information about what makes up the balance in the control account.

After posting all transactions the balance of the Control Account and the sum of the detailed records in the Subsidiary Ledger should always be the same. In other words, a control account deals with summarized information while a subsidiary ledger deals with detailed information.

When used with Inventory, the Control Account is Merchandise Inventory Control and the Subsidiary Ledger is often referred to as the Inventory Stock Record Cards.

Does the balance of the Subsidiary Ledger always equal the balance of the Inventory Control Account ? No, the detailed Stock Records total will not always equal the Inventory Control Account. The totals will only agree after the General Ledger Inventory Control account has bee updated (posted) from the Journals. At the end of each accounting period they should always agree.

The Inventory Control Account and Stock Ledger Cards are only used with the Perpetual Inventory Method.

I hope you recall, especially those of you who have taken my Special Journals Tutorial, that entries are initially recorded in our Special Journals. The main journals used for recording our inventory transactions are the Sales and Purchases Journals.

Example Of Records Used For Recording and Maintaining Inventory

Let's revisit our Super Widgets Example from Lesson 2. The following information about our product Super Widget will be used to illustrate the record keeping involved using the Periodic and Perpetual Inventory Methods with the FIFO Costing Method. I could just as easily have chosen the LIFO or Average Cost Costing Method to use for our example. The record keeping requirements depend more on the Inventory Method (Periodic, Perpetual, Retail) selected rather than the costing method selected.

Since in lesson 2, we learned how to perform the calculations used with the different costing methods all we're going to do in this lesson is concentrate on the requirements and different records used with the Perpetual and Periodic Inventory Methods.

Our first illustration will deal with the Perpetual Inventory Method followed by an illustration of the Periodic Method.

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Sales of Super Widgets made during the year at a constant selling price of $15.00 throughout the year are as follows:
Date Quantity Sold Sales Amount Customer Invoice Number
January 20, xxxx 100 1,500 Big Bob's Office Supply 5050
March 30, xxxx 200 3,000 Honest Bob's Used Cars 5051
June 5, xxxx 150 2,250 Super Flic Movies 5052
June 30, xxxx 70 1,050 Shaggy Dog Vet 5053
October 20, xxxx 100 1,500 Greasy Spoon 5054
December 15, xxxx 90 1,350 Tiny's Gym 5055
December 31, xxxx 140 2,100 Whisper's Lounge 5056
   
Total Sales 850 12,750
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

FIFO with the Perpetual Inventory Method

Special Journals Sales and Purchases

Sales Journal-Comments and Observations
(1) Post Ref
The X in this column is used to indicate that the customer's account in the Accounts Receivable Subsidiary Ledger has been posted.

(2) Entry No.
Yellow highlights used to emphasize the Sales Journal posting references.
SJ-1 - Sales Journal January
SJ-3 - Sales Journal March and so on.

(3) (X)
The (X) indicates that the monthly totals have been posted to the General Ledger Accounts.

(4) The Yellow Highlighted Cost Of Goods Sold and Inventory Control is used to emphasize that these columns are included in the Sales Journal when the Perpetual Inventory Method is used. They are omitted from the Sales Journal when the Periodic Inventory Method is used.

Sales Journal Page 1
Entry No. Date Customer Account
Name/Description
Invoice Number Post Ref. Accounts Receivable
Acct-150
Debit
Sales
Acct-400
Credit
Sales Tax Payable
Acct-210
Credit
Cost Goods Sold
Acct-510
Debit
Inventory Control
Acct-155
Credit
1 Jan 20, xxxx Big Bob's Office Supply 5050 X 1,650 1,500 150 800 800
                   
SJ-1 Jan 31, xxxx Totals for Month     1,650 1,500 150 800 800
          (X) (X) (X) (X) (X)
2 Mar 30, xxxx Honest Bob's Used Cars 5051 X 3,300 3,000 300 1,650 1,650
                   
SJ-3 Mar 31, xxxx Totals for Month     3,300 3,000 300 1,650 1,650
          (X) (X) (X) (X) (X)
3 Jun 5, xxxx Super Flic Movies 5052 X 2,475 2,250 225 1,275 1,275
4 Jun 30, xxxx Shaggy Dog Vet 5053 X 1,155 1,050 105 595 595
                   
SJ-6 Jun 30, xxxx Totals for Month     4,630 4,300 330 1,870 1,870
          (X) (X) (X) (X) (X)
5 Oct 20, xxxx Greasy Spoon 5054 X 1,650 1,500 150 855 855
                   
SJ-10 Oct 31, xxxx Totals for Month     1,650 1,500 150 855 855
          (X) (X) (X) (X) (X)
6 Dec 15, xxxx Tiny's Gym 5055 X 1,485 1,350 135 787.50 787.50
7 Dec 30, xxxx Whisper's Lounge 5056 X 2,310 2,100 210 1,237.50 1,237.50
                   
SJ-12 Dec 31, xxxx Totals for Month     3,795 3,450 345 2,025 2,025
          (X) (X) (X) (X) (X)

Purchase Journal-Comments and Observations
(1) Post Ref
The X in this column is used to indicate that the supplier's account in the Accounts Payable Subsidiary Ledger has been posted.

(2) Entry No.
Yellow highlights used to emphasize the Purchase Journal posting references.
PJ-1 - Purchase Journal January
PJ-3 - Purchase Journal March and so on.

(3) (X)
The (X) indicates that the monthly totals have been posted to the General Ledger Accounts.

(4) The Yellow Highlighted Inventory Control is used to emphasize that this Account is used when the Perpetual Inventory Method is used. The Purchases Account is used when the Periodic Inventory Method is used.

Purchase Journal Page 1
Entry No. Date Supplier Account/Name Invoice Number Post Ref. Accounts Payable
Credit
Acct-200
Inventory Control
Debit
Acct-155
Other
Accounts
Debit
Post Ref Amount
Debit
1 Jan 15, xxxx Acme Products A-976123 X 1,650 1,650      
                   
PJ-1 Jan 31, xxxx Monthly Control Postings     1,650 1,650      
          (X) (X)      
2 Mar 5,xxxx Alternate Products 7898000 X 2,550 2,550      
                   
PJ-3 Mar 31, xxxx Monthly Control Postings     2,550 2,550      
          (X) (X)      
3 Sep 10, xxxx Acme Products A-999999 X 1,750 1,750      
                   
PJ-9 Sep 30, xxxx Monthly Control Postings     1,750 1,750      
          (X) (X)      
4 Dec 20, xxxx Acme Products B-789012 X 1,350 1,350      
                   
PJ-12 Dec 31, xxxx Monthly Control Postings     1,350 1,350      
          (X) (X)      

General Ledger Accounts

Comments and Observations
(1) The Inventory Control Account and Cost Of Goods Sold Account are posted on a monthly basis when the Perpetual Inventory Method is used. This provides us with the capability of preparing monthly (interim) financial statements.

(2) Post Ref
Identifies the Special Journal (source) of the monthly posting entries. The Merchandise Inventory Control Account has entries posted from the Purchases (increase) and Sales (decrease) Journals. The Cost Of Goods Sold Account only has entries posted from the Sales Journal.
PJ-1 Purchases Journal January
SJ-1 Sales Journal January
and so on.

(3) The yellow highlighted balances indicate the balance of the Inventory Control Account as of the end of the month (period).

Account Name:Merchandise Inventory Control Account Number:155
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       800
Jan 31   PJ-1 1,650   2,450
Jan 31   SJ-1   800 1,650
Mar 31   PJ-3 2,550   4,200
Mar 31   SJ-3   1,650 2,550
Jun 30   SJ-6   1,870 680
Sep 30   PJ-9 1,750   2,430
Oct 31   SJ-10   855 1,575
Dec 31   PJ-12 1,350   2,925
Dec 31   SJ-12   2,025 900
Account Name:Cost Of Goods Sold Account Number:510
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       0
Jan 31   SJ-1 800   800
Mar 31   SJ-3 1,650   2,450
Jun 30   SJ-6 1,870   4,320
Oct 31   SJ-10 855   5,175
Dec 31   SJ-12 2,025   7,200

Subsidiary Ledger

Comments and Observations
(1) The Inventory Stock Record Card (Subsidiary Ledger) is only maintained when the Perpetual Inventory Method is used. The end of period amounts should agree with the General Ledger Merchandise Inventory Control Account.

(2)The yellow highlighted balances indicate the balances on hand as of the end of the month (period).

(3)Note how the ending balances of the General Ledger Inventory Control Account presented earlier agree with the yellow highlighted detail ending balances of the Stock Record Card.

(4)Also note how at times the detail Stock Record Card and the General Ledger Inventory Control Account do not agree. This occurs because the stock record card is updated as transactions actually occur and the General Ledger Account is only updated at the end of the month.

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 8.25 1,650   2,450
100 @ $8.00
200 @ $8.25
Jan 20, xxxx   100 200     800
100 @ $8.00
1,650
200 @ $8.25
Mar 5, xxxx 300   500 8.50 2,550   4,200
200 @ $8.25
300 @ $8.50
Mar 30, xxxx   200 300     1,650
200 @ $8.25
2,550
300 @ $8.50
Jun 5, xxxx   150 150     1,275
150 @ $8.50
1,275
150 @ $8.50
Jun 30, xxxx   70 80     595
70 @$8.50
680
80 @ $8.50
Sep 10, xxxx 200   280 8.75 1,750   2,430
80 @ $8.50
200 @ $8.75
Oct 20, xxxx   100 180     855
80 @ $8.50
20 @ $8.75
1,575
180 @ $8.75
Dec 15, xxxx   90 90     787.50
90 @ $8.75
787.50
90 @ $8.75
Dec 20, xxxx 150   240 9.00 1,350   2,137.50
90 @ $8.75
150 @ $9.00
Dec 31, xxxx   140 100     1,237.50
90 @ $8.75
50 @ $9.00
900
100 @ $9.00
Totals 850 850     7,300 7,200
 

FIFO with the Periodic Inventory System

Our Schedule of Purchases, Sales and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Sales of Super Widgets made during the year at a constant selling price of $15.00 throughout the year are as follows:
Date Quantity Sold Sales Amount Customer Invoice Number
January 20, xxxx 100 1,500 Big Bob's Office Supply 5050
March 30, xxxx 200 3,000 Honest Bob's Used Cars 5051
June 5, xxxx 150 2,250 Super Flic Movies 5052
June 30, xxxx 70 1,050 Shaggy Dog Vet 5053
October 20, xxxx 100 1,500 Greasy Spoon 5054
December 15, xxxx 90 1,350 Tiny's Gym 5055
December 31, xxxx 140 2,100 Whisper's Lounge 5056
   
Total Sales 850 12,750
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Special Journals Sales and Purchases

Sales Journal-Comments and Observations
(1) Post Ref
The X in this column is used to indicate that the customer's account in the Accounts Receivable Subsidiary Ledger has been posted.

(2) Entry No.
Yellow highlights used to emphasize the Sales Journal posting references.
SJ-1 - Sales Journal January
SJ-3 - Sales Journal March and so on.

(3) (X)
The (X) indicates that the monthly totals have been posted to the General Ledger Accounts.

(4) Note that the Inventory Control Account and Cost Of Goods Sold Account are omitted from the Sales Journal when the Periodic Inventory Method is used.

Sales Journal Page 1
Entry No. Date Customer Account
Name/Description
Invoice Number Post Ref. Accounts Receivable
Acct-150
Debit
Sales
Acct-400
Credit
Sales Tax Payable
Acct-210
Credit
1 Jan 20, xxxx Big Bob's Office Supply 5050 X 1,650 1,500 150
               
SJ-1 Jan 31, xxxx Totals for Month     1,650 1,500 150
          (X) (X)  
2 Mar 30, xxxx Honest Bob's Used Cars 5051 X 3,300 3,000 300
               
SJ-3 Mar 31, xxxx Totals for Month     3,300 3,000 300
          (X) (X)  
3 Jun 5, xxxx Super Flic Movies 5052 X 2,475 2,250 225
4 Jun 30, xxxx Shaggy Dog Vet 5053 X 1,155 1,050 105
               
SJ-6 Jun 30, xxxx Totals for Month     4,630 4,300 330
          (X) (X)  
5 Oct 20, xxxx Greasy Spoon 5054 X 1,650 1,500 150
               
SJ-10 Oct 31, xxxx Totals for Month     1,650 1,500 150
          (X) (X)  
6 Dec 15, xxxx Tiny's Gym 5055 X 1,485 1,350 135
7 Dec 30, xxxx Whisper's Lounge 5056 X 2,310 2,100 210
               
SJ-12 Dec 31, xxxx Totals for Month     3,795 3,450 345
          (X) (X)  

Purchase Journal-Comments and Observations
(1) Post Ref
The X in this column is used to indicate that the supplier's account in the Accounts Payable Subsidiary Ledger has been posted.

(2) Entry No.
Yellow highlights used to emphasize the Purchase Journal posting references.
PJ-1 - Purchase Journal January
PJ-3 - Purchase Journal March and so on.

(3) (X)
The (X) indicates that the monthly totals have been posted to the General Ledger Accounts.

(4) The Yellow Highlighted Purchases is used to emphasize that this Account is used when the Periodic Inventory Method is used. The Inventory Control Account is used when the Perpetual Inventory Method is used.

Purchase Journal Page 1
Entry No. Date Supplier Account/Name Invoice Number Post Ref. Accounts Payable
Credit
Acct-200
Purchases
Debit
Acct-515
Other
Accounts
Debit
Post Ref Amount
Debit
1 Jan 15, xxxx Acme Products A-976123 X 1,650 1,650      
                   
PJ-1 Jan 31, xxxx Monthly Control Postings     1,650 1,650      
          (X) (X)      
2 Mar 5,xxxx Alternate Products 7898000 X 2,550 2,550      
                   
PJ-3 Mar 31, xxxx Monthly Control Postings     2,550 2,550      
          (X) (X)      
3 Sep 10, xxxx Acme Products A-999999 X 1,750 1,750      
                   
PJ-9 Sep 30, xxxx Monthly Control Postings     1,750 1,750      
          (X) (X)      
4 Dec 20, xxxx Acme Products B-789012 X 1,350 1,350      
                   
PJ-12 Dec 31, xxxx Monthly Control Postings     1,350 1,350      
          (X) (X)      

General Ledger Accounts

Comments and Observations
(1) Note that the only General Ledger Inventory related account that had any transactions posted during the year was the Purchases Account. The Merchandise Inventory Account has the beginning balance and no other transactions posted and the Cost Of Goods Sold Account likewise has no transactions posted.

(2) Without ending inventory balances and cost of goods sold balances during the year, we are unable to prepare monthly (interim) financial statements without performing a physical count and making adjusting entries.

Account Name:Merchandise Inventory Account Number:155
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       800
           
           
Account Name:Purchases Account Number:515
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       0
Jan 31   PJ-1 1,650   1,650
Mar 31   PJ-3 2,550   4,200
Sep 30   PJ-9 1,750   5,950
Dec 31   PJ-12 1,350   7,300
Account Name:Cost Of Goods Sold Account Number:510
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       0
           
           

Of course our first step in determining our inventory is taking a physical inventory of the goods on hand as of the end of our year (period). After counting our Super Widgets, we recorded 100 units on our count sheet.

Now that we have the quantity, we need to assign costs to the cost of units that were sold (Cost Of Goods Sold) and our remaining units on hand (Ending Inventory). We need to work backward from our most recent purchases (supplier invoices) in order to gather the unit cost(s) to use for valuing our ending inventory. Since the FIFO Costing Method assumes that the earliest (oldest) goods are sold first, then the goods on hand would have the newest costs assigned to them.

Fortunately, as I recommended in Lesson 1, although not absolutely necessary in our example we maintained a detail record of our purchases for the year. If we had not, we would have to dig through supplier invoices in order to find the unit cost(s) to use. This can be a very time consuming process. Why ? Just think of all the supplier invoices you receive in a year. To make matters worse, most invoices contain many products that are billed on the same invoice.

From our schedule or search and analysis of invoices, our newest invoice is from our supplier Acme Products, dated December 20, xxxx, Invoice Number B-789012, for 150 units at a unit cost of $9.00. Since we only have 100 units remaining in our ending inventory, we lucked out.

All our Super Widgets will be assigned a unit cost of $9.00 using the unit cost from Invoice Number B-789012 dated December 20, xxxx resulting in an Ending Inventory Value of $900.00 (100 units @ $9.00).

Using the data from our Schedule, the calculation of the cost assigned to our units sold (Cost Of Goods Sold) is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800 100
Purchases $7,300 850
Total Cost and Units To Account For $8,100 950

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
Total Dollars and Units To Account For $8,100.00 950
Less: Costs and Units Assigned To Ending Inventory 900.00 100
Costs and Units Assigned To Cost Of Goods Sold $7,200.00 850

General Journal

After determining the values for our Ending Inventory and Cost Of Goods Sold the Periodic Method requires adjusting entries in order to update our General Ledger Inventory and Cost Of Goods Sold Accounts. We saw earlier that the only inventory related account that had any transactions posted was the Purchases Account that is used with the Periodic Inventory Method.

Merchandise Inventory 7,300  
   Purchases   7,300
Cost Of Goods Sold 7,200  
   Merchandise Inventory   7,200

JE #50 - Entry to record Ending Inventory and Cost Of Goods Sold for the year.

Our General Ledger Accounts after posting our adjustments appear below.

General Ledger Accounts

Account Name:Merchandise Inventory Account Number:155
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       800
           
Dec 31 Adjusting JE #50   7,300   8,100
Dec 31 Adjusting JE #50     7,200 900
Account Name:Purchases Account Number:515
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       0
Jan 31   PJ-1 1,650   1,650
Mar 31   PJ-3 2,550   4,200
Sep 30   PJ-9 1,750   5,950
Dec 31   PJ-12 1,350   7,300
Dec 31 Adjusting JE #50     7,300 0
Account Name:Cost Of Goods Sold Account Number:510
Date Description Post Ref. Debit Credit Balance
Jan 1 Beg Bal.       0
           
Dec 31 Adjusting JE #50   7,200   7,200
Well you've almost made it thru another journey into the world of bookkeeping with me. I hope your adding machine didn't run out of tape following along with the examples and doing the calculations and checking mine. You did do this didn't you ? I know I didn't tell you to, but if you didn't you might want to review this tutorial and actually perform some of the calculations on your own. As your reward, this lesson doesn't have any quizzes.
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