Seller Entries under Perpetual Inventory Method.docx -...

This preview shows page 1 - 3 out of 10 pages.

Seller Entries under Perpetual Inventory MethodThe accounting is very different for sellers than for buyers. Remember, under the perpetualinventory method, we used a combination of 3 accounts (Cash, Inventory and Accounts Payable)on the buyer side. This is not the case for the seller. The seller will use the following accounts:NameAccount TypeIncreasesDecreasesCashCurrent assetDebitCreditAccounts ReceivableCurrent assetDebitCreditMerchandise InventoryCurrent assetDebitCreditSales RevenueRevenueCreditDebitSales Discounts*RevenueDebitCreditSales Returns and Allowances*RevenueDebitCreditCost of Goods SoldExpenseDebitCreditDelivery ExpenseExpenseDebitCredit*Sales discounts and sales returns and allowances are contra-accounts. Notice how they increasewith a debit and decrease with a credit even though they are revenue accounts.Cost of goods soldCost of goods sold is exactly what the account name reads: it is the cost of the goodsmerchandise inventory) to the seller that is now being sold to customers.Cost of goods sold isnot the price charged to customers but what a company paid for the goods they are nowselling.Cost of Goods Sold is anEXPENSEitem. Even though we do not see the word Expensethis in fact is an expense item found on the Income Statement as areduction to Revenue.Recording SalesSales are recorded in a Sales Revenue (or Sales) account and is the price we charge to thecustomers. Sales can be cash or have credit terms (on account) using Accounts Receivable sincewe will receive money from the customer in the future. To record sales, we will debit Cash orAccounts Receivable, depending on payment, and credit Sales Revenue.But, we must also match the revenue and expenses incurred (remember the matching principle?)and we will record the expense cost of goods sold. Remember, cost of goods sold is the seller’scost for the items they are now selling to a customer and is NOT the selling price. We beginlearning this concept by having cost of goods sold amounts provided but in a later section, youwill learn to calculate the amount yourself. We will debit the expense Cost of Goods Sold butwhat was it we were selling? Right! Merchandise or merchandise inventory so we will reduce(credit) merchandise inventory since we no longer have the goods.To illustrate the perpetual inventory method journal entries, assume that Smith Company madetwo sales of merchandise to Hanlon Food Store:
On May 4, Smith sold $30,000 of merchandise with credit terms of 2/10, n30 andshipping terms FOB Destination. The original cost to Smith was $18,000.on May 21, Smith sold $20,000 of merchandise for cash with shipping terms FOBShipping Point. The original cost to Smith was $15,000.The journal entries to record the sale and cost of goods sold for each date would be:DateAccountDebitCreditMay 4Accounts Receivable30,000Sales Revenue30,000To record sale of merchandise on creditMay 4Cost of goods sold18,000Merchandise Inventory18,000To record cost of merchandise sold to customers.

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 10 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
One
Professor
N/A
Tags
Generally Accepted Accounting Principles, Sales Discounts, sales returns

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture