Alright, so now let's go into a little more detail about purchasing inventory in a periodic inventory system. So we're gonna see, is that a merchandizing company just like we've been talking about, they're generally gonna buy goods in bulk, whoops, buck in bulk and sell them to customers individually. Right? That's kind of where they make their money is by buying a little cheaper and then splitting it up and selling it to customers. One thing I want to note real quick before we continue is that I've made the same, pretty much almost exactly the same lessons for a perpetual system. Right. So most books focus solely on the perpetual system, some books solely on the periodic and some books focus on both. Right? So if you have both, it's really nice to have both lessons and you can compare and contrast all of these topics between the two systems. All right. And if you only have a perpetual system in your book or your teachers only focusing perpetual again, I don't know why you're here right now, but let's go ahead and learn periodic purchases. So, one thing I want to note real quick is that the companies purchase all sorts of things. We don't just purchase inventory inventory is the things that we're gonna resell when we purchased goods for resale that goes into our inventory account. Right, That is an inventory purchase. But what about when we buy pens, paper, staplers, office supplies like that, that goes into our supplies account. Right? So you want to make a distinction of where you're putting your purchases, the only thing that goes in inventory is things that we buy to resell. Okay. The last thing is a copy machine. So a copy machine. Yeah. This is a long term asset. Right? This might go into machinery, equipment, something like that. Right? Something a long term asset is gonna last us a few years. So notice our focus in this section is on these goods acquired for resale going into inventory. Right? We're focusing on the inventory account. So let's go ahead and continue here in a periodic system. We use separate accounts. Okay? We're gonna use separate accounts to account for it inventory purchase transactions. This is different from a perpetual system. Okay A perpetual system. Everything just flows through inventory here. We're gonna have special accounts for purchases, purchase return an allowance and purchase discounts. Okay so let's go into these in a little detail. The purchases. Well this is the value of all goods. Guess what purchased during the period, notice that it doesn't go straight to inventory. We're not debating inventory for these purchases. Were debating a purchases account. Next one, purchase returns and allowances. So this is the value of purchases that are returned. So if we bought something and then returned it to the supplier or discounted if they discount it because of a quality issue. Okay that's a key. That's a key thing about the allowances. The allowances are discounts for quality, some issue with the quality, some unhappiness you have with the product when it arrives compared with the purchase discount notice the purchase discount is value of discounts received for quick payment. So when we pay our suppliers quickly they might offer us a discount for that quick payment. Okay so let's go ahead and start here with a purchase. When the company purchases goods we debit the purchases account notice in this situation we are debating the purchases account not the inventory account. So things on shelves. Company purchased 500 units of things on account at a price of $5 per thing. Well that's 500 things times $5. They purchased $2500 worth of things. Right So in a perpetual system this would go straight to our inventory. But here we're going to debit purchases. This is our debit entry right here for 2500 and we're going to credit it says on account right we didn't pay them in cash. So we're gonna credit accounts payable ap for 2500. Okay accounts payable, that's money that we owe and we owe it to our suppliers. So in this case what what what exactly has happened. This is pretty simple. Right? We see that our purchases went up purchases is a type of inventory account so it does in essence increase our assets right? We're just holding this inventory value somewhere else just so we keep track of all our purchases during the period. Okay and our liabilities went up right? We saw that a P. Went up by 2500 as well. Cool. Alright, so our balance, our equation stays balanced. Let's go ahead, pause here. Um In the next video we'll continue with purchase returns, purchase allowances, we'll figure out all the rest of this stuff. Alright, let's keep going.

All right so let's continue here with purchase returns. So this is when the company returns goods for a refund. Right? They they are not happy they just want their money back there returning for a refund to purchase return. So T. O. S. Company returned 100 units of things to its suppliers up above. We said those things were at $5 apiece. So how much are they returning 100 things at $5 apiece. They're returning $500 worth. Okay that $5 value came from our previous previous example where they told us at a price of $5 per thing up there. Okay so the company returns goods we're talking about a purchase return so they returned $500 worth of goods. So in this case what we're gonna do instead of crediting our inventory account we're going to credit a special account for the purchase returns. So the debit in this situation. Right? We we 1st 1st of all in the first question we had bought 500 things. Right so we owed money for 500 things but now we're returning 100. So we're gonna go less money. Right? So we need to debit our accounts payable to lower the value of accounts payable by this $500 value of the 100 things. So the 100 things having a $5 value each. We're gonna lower the amount that we have to pay by $500. And we're going to credit the purchase returns account notice that this is a credit account returns, purchase returns for 500. Okay So there was a debit to accounts payable for 500. To lower the amount we owe because we return something and then we're gonna hold all the value of all our returns in this purchase returns account for $500. Cool. All right. So what happened in this question? Well, the purchase returns, This is a contra asset. This is a contra inventory account. Right? Because it lowers the value of inventory. The purchase returns hold a credit balance even though they're part of the assets. Right? That makes them a contra account. And this $500 value is actually decreasing the value of our assets by 500. Right, this is a credit to an asset account. So that's decreasing values of assets. Okay, so the purchase returns is decreasing our assets but we're also decreasing our liabilities by 500. Right? So there we go. We're notice what we're doing at this point. We're storing value. We've stored the value of our purchases in a purchase account. We've stored the value of purchase returns in a purchase returns account and then at the end of the period. Remember this is a periodic system? We're going to reconcile all these numbers. All right. So let's go ahead and pause here and then continue in the next video

All right so let's continue here with the purchase allowance. So this is when a company keeps the goods but they're unsatisfied. So the supplier lowers the price. There's some sort of quality issue they want to discount on the goods that they're gonna keep. Okay so T. O. S. Ordered 500 things on account at $5 per thing. When low quality things arrive, the supplier agreed to lower the price to $2 per thing. Okay so notice we had an original entry, we would have made some sort of entry like purchase purchases. Uh well it was 500 things times $5 a thing. 2500. Right? So we would have increased our purchases by 2500. And our accounts payable right? We're gonna eventually have to pay for these things at 2500. But then we inspected the things and we weren't so happy with them. Right? They were low quality. And the supplier agreed to charge only $2 per thing. So 500 let me do it right underneath. 500 times $2 per thing. Well that's $1000. Right? So 1000 is what our inventory should actually be. We purchased 2500. Well we need to lower that value by the difference right to get it down to 1000. So 2500 minus the 1000. This 1500 is the amount we need to lower the value of our inventory right? Because we're only paying $2 per thing. So we would make some sort of entry to lower the value of our inventory. The other part of the entry is the accounts payable. Right we're no longer gonna go have $205 per thing to them. We only owe $2 per thing so we only owe them $1000. So we also need to decrease our accounts payable by that same 1500. So we're gonna have a debit to accounts payable. So I'll do a debit to accounts payable for 2500. Excuse me. 1500. Right this debit of 1500 brings the balance down to 1000 and we're gonna credit purchase allowances For 1500. Okay so notice this doesn't go straight to the inventory account again, we're storing the value of these allowances and then at the end of the period we're gonna net all these things together to figure out the inventory and the cost of goods sold. Cool. Alright so let's see what happened here. The purchases. Well those purchases are gonna increase the value of our assets, right? We bought inventory and then our ap we owed money of 2500. But then in the second entry the ap went down right down to the 1000 that we actually oh so it went down by 1500. And our purchase allowance is gonna lower the value of our of our assets because it is a contra inventory account that lowers the value of inventory of our net inventory at the end. Okay so it's going to be decreasing our assets there and you'll see that the assets went up by a net of 1000, and so did the liabilities. So we are good here. Alright, let's go ahead and pause here and then do a practice problem.