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BUYING AND SELLING INVENTORY Companies can choose whether they wish to use the periodic method or the perpetual method. With the periodic method , the Inventory account is updated only once during the year—at the end of the year. The COGS account is used only once a year—at the end of the year. After making a physical count of ending inventory, we must calculate the COGS using the formulas Beginning Inventory + Net Purchases* = Cost of Goods Available Cost of Goods Available – Ending Inventory = Cost of Goods Sold The net purchases are closed to the Inventory account, the inventory is adjusted to what is actually on hand at year end by transferring costs to the COGS account and the COGS account is then closed to RE with the other expenses. *Net Purchases will be defined later. With the perpetual method , the Inventory account is updated with every purchase and sale. It is increases when Inventory is purchased and decreases, through a transfer of costs to the expense account COGS, when Inventory is sold. Theoretically it is accurate at all times. However, because there may be some Inventory “Shrinkage”, we need to take a physical count at year end to know how much we actually have on hand. We then adjust the Inventory account to bring it actual. At the end of the year, the COGS account is closed to RE. Let’s look at the entries for the buyer and seller using perpetual and periodic methods. Hint: if the sale is on account, the seller will have a receivable which will be collected in cash later. At the same time the buyer will have a payable which will be paid in cash later. SALE ON ACCOUNT: On November 1, Selling Company sells 40 chairs at \$150 each to Buying Company, terms 2/10, n/30. The chairs cost \$70 each. The total sales = 40 x \$150 = \$6,000. The cost of the chairs = 40 x \$70 = \$2,800. PERPETUAL

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