BAF3M-U5-L03 · BAF3M
Perpetual inventory transactions
Learning goals
- Journalize purchases, freight, returns, and discounts in a perpetual system.
- Record both revenue and cost sides of a sale.
- Record both sides of a customer return when goods re-enter saleable inventory.
- Reconcile the ledger quantity/cost with a physical count.
Prerequisite check
Under periodic accounting, what entry is deliberately missing at the time of sale? Why is an ending physical count still required?
Vocabulary
- Perpetual inventory record: continually updates the Inventory account and supporting item records.
- Dual entry: the two linked entries for a sale—selling-price revenue and inventory-cost transfer.
- Inventory shrinkage: book inventory greater than physical inventory because of loss, damage, theft, or recording error.
- Subsidiary inventory record: detailed quantity and cost record supporting the general-ledger Inventory control account.
- Cost flow: movement of recorded cost from Inventory to COGS when goods are sold.
Core idea
Perpetual accounting records inventory cost as it moves. Purchases, buyer freight, returns, and purchase discounts change Inventory directly. A sale needs a revenue entry and a cost entry.
This lesson continues to ignore sales tax until Lesson 4.
Why this treatment makes sense
The business needs both what the customer owes and what inventory left the business. Recording only Sales would overstate assets and profit. Recording only COGS would omit revenue and receivable/cash.
A repeatable method
- Incoming goods: debit Inventory.
- Buyer freight under stated terms: debit Inventory.
- Return or supplier allowance affecting cost: credit Inventory.
- Purchase discount: credit Inventory under the course's gross perpetual convention.
- Sale: debit Cash/A/R, credit Sales and debit COGS, credit Inventory.
- Saleable customer return: reverse both selling-price and cost entries.
- Compare book inventory with physical count and investigate differences.
Worked example
Pinecone Games has $2,000 opening Inventory and repeats the prior lesson's tax-excluded events under a perpetual system. The goods sold for $9,000 cost $5,400; goods returned by the customer for $600 had cost $360.
| Event | Perpetual entry |
|---|---|
| Buy $6,000 goods | Dr Inventory $6,000 / Cr A/P $6,000 |
| Buyer freight $300 | Dr Inventory $300 / Cr Cash $300 |
| Return $800 to supplier | Dr A/P $800 / Cr Inventory $800 |
| Pay after return with $104 discount | Dr A/P $5,200 / Cr Cash $5,096 / Cr Inventory $104 |
| Sell for $9,000 | Dr A/R $9,000 / Cr Sales $9,000; Dr COGS $5,400 / Cr Inventory $5,400 |
| Customer returns $600, cost $360 | Dr Sales Returns $600 / Cr A/R $600; Dr Inventory $360 / Cr COGS $360 |
| Collect with $168 discount | Dr Cash $8,232 / Dr Sales Discounts $168 / Cr A/R $8,400 |
Inventory ending before any shrinkage = $2,000 + $6,000 + $300 − $800 − $104 − $5,400 + $360 = $2,356.
Net COGS from these sales/returns = $5,400 − $360 = $5,040. If the physical count is $2,300, investigate the $56 shortage and record only according to the stated policy and evidence.
Journal, ledger, and statement connection
The general-ledger Inventory account should agree with item records and physical evidence after reconciling differences. COGS accumulates during the period and reaches the income statement. Software often automates the second sale entry, but the user must verify item cost, quantity, and mapping.
Common mistakes
- Using Purchases and Freight-in under a stated perpetual system.
- Recording only the selling-price side.
- Reversing customer revenue but not restoring saleable inventory cost.
- Restoring inventory at selling price rather than cost.
- Assuming the ledger equals the count without investigation.
- Copying a software-generated cost without checking item records.
Guided practice
Perpetual, tax excluded:
- Buy inventory $4,000 on account.
- Pay $180 buyer freight.
- Sell goods for $3,500 cash; cost $2,100.
- Customer returns goods sold for $400; their cost was $240 and they are saleable.
Journalize and find the net effect on Inventory and COGS.
Independent practice
Opening Inventory is $5,500. Journalize: purchase $9,000 on account; return $1,200; pay buyer freight $450; pay the remaining supplier balance within a 2% discount period; sell for $12,000 on account, cost $7,000; customer receives a $300 price allowance but keeps the goods. Find ending Inventory before count and gross profit from this sale.
Self-check and solutions
Guided practice: Dr Inventory $4,000 / Cr A/P; Dr Inventory $180 / Cr Cash; Dr Cash $3,500 / Cr Sales and Dr COGS $2,100 / Cr Inventory; Dr Sales Returns $400 / Cr Cash $400 because the original sale was for cash, and Dr Inventory $240 / Cr COGS. Net Inventory change = $4,000 + $180 − $2,100 + $240 = +$2,320. Net COGS = $1,860.
Independent practice: Return leaves payable $7,800. Discount = $156; payment is $7,644. Inventory = opening $5,500 + $9,000 − $1,200 + $450 − $156 − $7,000 = $6,594. Entries credit Inventory for return and discount. The $300 customer allowance debits Sales Returns and Allowances and credits A/R; no cost entry because goods stay with the customer. Net sales $11,700; COGS $7,000; gross profit $4,700.
Retrieval practice
Write periodic and perpetual entries side by side for a purchase, freight, return, purchase discount, sale, and customer return.
Exam-style application
Software posts Dr Cash $2,260 / Cr Sales $2,260 for an item sale but no inventory-cost entry. The item record shows cost $1,400. Diagnose the statements before repair and prepare the missing entry, ignoring tax.
Answer outline: Inventory is overstated $1,400, COGS understated $1,400, and profit/equity overstated $1,400. Record Dr COGS $1,400 / Cr Inventory $1,400, link it to the sale, and investigate why automation failed.
Lesson summary
Perpetual accounting updates Inventory and COGS as goods move. Every sale has a selling-price trail and a cost trail, both of which need evidence and checks.