Page 286 - Accounting Principles (A Business Perspective)

An accounting perspective:

Uses of technology

Keeping track of inventories under a perpetual inventory system is much more cost-effective with

computers. Under a manual system, the cost of an up-to-date inventory for stores with high
turnover would outweigh the benefit. Most retail stores use scanning devices to read the inventory
numbers of products purchased at the cash register. These bar codes not only provide accurate
sales prices but also record the merchandise sold so that the total cost of the store's inventory is up
to date.

The following comparison reveals several differences between accounting for inventories under periodic and
perpetual procedures. We explain these differences by using data from Exhibit 48 and making additional
assumptions. Later, we discuss other journal entries under perpetual inventory procedure.

These entries record the purchase on July 5 under each of the methods:
Periodic Procedure Perpetual Procedure
Purchases (+A) 3,000 Merchandise Inventory (+A) 3,000
Accounts Payable (+L) 3,000 Accounts Payable (+L) 3,000
Assuming the merchandise sold on July 7 was priced at USD 4,800, these entries record the sale:
Periodic Procedure Perpetual Procedure
Accounts Receivable (+A) 4,800 Accounts Receivable (+A) 4,800
Sales (+SE) 4,800 Sales (+SE) 4,800
Cost of Goods Sold (-SE) 3,600
Merchandise Inventory(-A) 3,600
Several other transactions not included in Exhibit 48 could occur:
• Assume that two of the units purchased on July 5 were returned to the supplier because they were defective.
The entries would be:
Periodic Procedure Perpetual Procedure
Accounts Payable 600 Accounts Payable 600
Purchase Merchandise
Returns and Inventory 600
Allowances 600
• Assume that the supplier instead granted an allowance of USD 600 to the company because of the defective
merchandise. The entries would be:
Periodic Procedure Perpetual Procedure
Accounts Payable (-L) 600 Accounts Payable (-L) 600
Purchase Merchandise
Returns and Inventory (-A) 600
Allowances (-A) 600
• Assume that the company incurred and paid freight charges of USD 100 on the purchase of July 5. The
entries would be:
Periodic Procedure Perpetual Procedure
Transportation-In (+A) 100 Merchandise Inventory 100
Cash (-A) 100 (+A) 100
Cash (-A)
In these entries, notice that under perpetual inventory procedure the Merchandise Inventory account records
purchases, purchase returns and allowances, purchase discounts, and transportation-in. Also, when goods are sold,
the seller debits (increases) Cost of Goods Sold and credits or reduces Merchandise Inventory.

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