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:

  1. Close temporary accounts.

  2. Establish Cost of Goods Sold.

  3. 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.