lecture recording on 06 March 2025 at 14.48.54 PM
Discount Assumptions
Gross method: assumes nobody takes the discount until they do.
Alternative assumption: everyone takes the discount until they don't.
Inventory Accounting Systems
Need to understand both Perpetual and Periodic inventory systems.
Exercise 7-8 will illustrate different scenarios under both systems.
Perpetual Inventory Method using Gross Method
Transaction Date: February 1
Purchased merchandise for $10,800 with a 10% trade discount (current sale).
Effective purchase price: $10,800 x 0.90 = $9,720.
Terms: 3% discount if paid early, due in 60 days.
Returning Items
Assume return of 90% of returned items.
Calculate the return amount: $9,720 x 0.10 = $972.
Debit Accounts Payable and Credit Inventory to reflect the change in stock.
Payment Date: February 13
Still eligible for the discount: calculate the new Accounts Payable balance after return = $9,720 - $972 = $8,748.
Payment amount: $8,748 x 0.97 = $8,487.56 (cash after discount)
Credit Inventory to reflect the discount taken: $8,748 - $8,487.56 = $260.44.
Periodic Inventory Method using Gross Method
Repeat all transactions with periodic method assumptions.
On Feb 1, debit Purchases and credit Accounts Payable for the gross amount ($10,800).
At the end of the period, an adjusting entry is needed to account for purchases and reflect true cost, using temporary accounts.
Payments in Periodic Method
Pay the balance on February 13:
Debit Accounts Payable for full amount ($8,748).
Credit Cash for net amount after discount consideration.
Record discounts taken as Purchases Discounts (temporary account).
Net Method Execution
If the net method is employed, assume everyone takes the discount at the outset.
Example for Perpetual under the net method:
Debit Inventory for net amount: $10,800 x 0.97 = $10,476.
Credit Accounts Payable for the same amount and proceed with payment.
Adjusting Entries for Periodic Inventory Systems
Periodic systems require adjustments at the period's end.
Key objectives when making adjusting entries:
Close temporary accounts.
Establish Cost of Goods Sold.
Update Inventory.
Example of adjusting entries for Periodic Inventory:
Close Purchases account by debiting it and crediting the total amount to Cost of Goods Sold.
Update inventory account reflecting the final amount after calculating cost of goods sold.
Additional Examples to Consider in Inventory Accounting
Merchandise Owned: The timing of ownership transfer (e.g., FOB shipping point vs. FOB destination) changes who counts as the owner for inventory assessments.
Sales Entries: Proper recording of sales must also account for whether products physically belong to the seller or have already transferred to the buyer, especially for unshipped goods.