Merchandising Operations and the Accounting Cycle - Pearson

Supplement to Chapter 5
Accounting for Merchandise in a
Periodic Inventory System
Purchasing Merchandise
in the Periodic Inventory System
Some businesses find it uneconomical to invest in a computerized (perpetual) inventory
system that keeps up-to-the-minute records of merchandise on hand and cost
of goods sold.
Recording Purchases of Inventory
All inventory systems use the Inventory account. But in a periodic inventory system,
purchases, purchase discounts, purchase returns and allowances, and freight costs
are recorded in separate expense accounts bearing these titles. Let’s account for
Austin Sound Centre Inc.’s purchase of the JVC goods in Exhibit 5S-1. For the moment,
disregard GST and use the invoice total of $707.00 when recording purchases
and purchase discounts. GST is discussed on page 234. The following entries record
the purchase and payment on account within the discount period:
May 27 Purchases ................................................................... 707.00
Accounts Payable................................................ 707.00
Purchased inventory on account.
June 10 Accounts Payable........................................... 707.00
Cash............................................................ 685.79
Purchase Discounts ($707.00 × 0.03) ...... 21.21
Paid for inventory on account within discount period.
The discount is $21.21.
Recording Purchase Returns and Allowances
Suppose instead that prior to payment, Austin Sound returned to JVC goods costing
$70 and also received from JVC a purchase allowance of $10. Austin Sound
would record these transactions as follows:
June 3 Accounts Payable ..................................................... 70.00
Purchase Returns and Allowances ................... 70.00
Returned inventory to seller.
June 4 Accounts Payable ..................................................... 10.00
Purchase Returns and Allowances ................... 10.00
Received a purchase allowance.
During the period, the business records the cost of all inventory bought in the
Purchases account. The balance of Purchases is a gross amount because it does not
include subtractions for purchase discounts, returns, or allowances. Net purchases
is the remainder computed by subtracting the contra accounts from Purchases:
Purchase (debit balance account)
– Purchase Discounts (credit balance account)
– Purchase Returns and Allowances (credit balance account)
= Net purchases (a debit subtotal, not a separate account)
OBJECTIVE S2
Account for the purchase and
sale of inventory under the
periodic inventory system
KEY POINT
A contra account always has a
companion account with the
opposite balance. Thus both
Purchase Discounts and Purchase
Returns and Allowances (credit
balances) are reported with
Purchases (debit balance) on the
income statement.
Chapter Five Merchandising Operations and the Accounting Cycle 279