Perpetual Inventory - Purchases

Alright, so let's go a little more in detail about purchasing in a perpetual inventory system. So one thing I want to note real quick, we're gonna have a deep discussion about the perpetual inventory system and then we're gonna have a very similar discussion about periodic inventory systems. A lot of books only focus on one of these. And it's usually the perpetual system that the books will cover, some books like to do both of them. So I have separate lessons that are very similar. So you can compare and contrast between the two and then of course some are only periodic. And then I'm not sure why you would be watching this video. If you're only studying periodic anyways, let's go ahead and dive into the perpetual here. So we're gonna dive into purchases and we're gonna think about a merchandizing company that generally what their business is, is to buy goods in bulk, right, they're gonna buy a bunch of goods in a big bulk to save money and then sell them to customers individually. Right? So they'll break up these bulk purchases and sell it to the customers in smaller amounts. Right? That's kind of a standard business model. But we have to remember when we're talking about inventory, we're only thinking about that one product that we're in the business to sell. Right? So for a T shirt company, our inventory is gonna have t shirts in it, right? There's not gonna be like computers in our inventory or equipment or machines, right? None of that's gonna be inventory. The only thing that's inventory is that merchandise that we're selling. So notice that companies are going to purchase many different things. The goods they acquire for resale like that T shirt company. Well that's gonna go into inventory, right? If they're gonna buy something that they're planning on reselling that's why they're in business, that's their inventory. But what if they're buying like pens, paper, stapler, office supplies, you know equipment like that? That's going to go into our supplies category. Right. So notice the difference there between the supplies and the inventory right? Supplies is stuff that gets used around the office where inventory is what we're actually selling and a copy machine. Right if we buy a copy copy machine that would be something like machinery or equipment, something like that. Some sort of long term asset. Right So we're gonna see that we can make all sorts of purchases. But the purchases we're focused on. Now are these inventory purchases, right, inventory purchases. So let's go ahead and see how this works when the company purchases goods. We debit the inventory account right? We're gonna increase our inventory for the goods that they purchase. So let's look at this example. T. O. S. Company purchased 500 units of things on account at a price of $5 per thing. Okay so we have a price that they paid how many they bought and how they bought it. So let's go into the details here they bought 500 units times $5 right? Each one cost $5. So they spent $2500 right? 2500 is the value of the goods that they bought. So that's what's gonna go into the inventory, right? We're gonna increase our inventory with a debit for that 2500 of stuff they bought. I noticed this has nothing to do with selling it yet. This is just purchasing it. We haven't sold anything yet. So inventory is going up by 2500 and they told us we bought it on account, so we buy something on account, we're not paying cash, right? We're giving them an iou so what's going to be our credit in this journal entry? Well, it's not gonna be accounts receivable, right, accounts receivable, We're talking about things were supposed to receive. This is something we're gonna pay, right? This is an accounts payable. It's an iou we gave to the other company. So we're going to credit our accounts payable to increase that liability. I'm gonna put a p it's a very common uh acronym for accounts payable that we use. And we're gonna credit that the 2500, right? Because that's the amount that we owe to our supplier. So in this example we saw that the inventory went up by 2500 And the liabilities, right? We owe money, this went up by 2500 and there was no effect on our equity, right? So there you go. Our balance, our equation stays balanced, the assets went up and the liabilities went up by the same amount. So we're good here. Alright, let's pause. And in the next video we'll discuss purchase returns. Alright, let's do that now.

All right? So let's continue here at the top of the screen if the company returns the goods to the supplier for a refund. So now this is a situation where we bought goods and we're not so satisfied we want to return it to the supplier. Right? This is called a purchase return. Okay? And when we're in a perpetual inventory system, all of this happens in the inventory account. Okay? So let's see what happens. T. O. S. Company returned 100 units of things to its supplier. So up above we saw that they bought those things at $5 per thing and now they're returning 100 of them. Right? So this is gonna be 100 times the $5 price. There's a value of $500 that we're returning to the supplier. Right? So we're returning these 100 units. So we don't have these units. Right? We're gonna have to get rid of them from our inventory because they were previously in our inventory and now we got to get rid of them. Okay? So we're gonna have a credit to our inventory to lower the inventory. And we're gonna have a debit to our accounts payable, right? Because we debit the accounts payable because we don't owe this money anymore. Right? In our first example, we said we're gonna owe them 2500 for the 500 units. Well, we don't have 500 units anymore. We only have 400 that we need to pay for. Right? So we need to lower it by that 500. So this this 500, right? Here is a debit to accounts payable. Which is lowering the amount that we in essence o to the supplier now and we're crediting inventory right? Because we at first said we were gonna have these 500 units in inventory But we're selling back or we're giving back 100. So where there's only gonna be 400 units in in our inventory. So we're crediting this $500 value. Right? This is the value of those 100 units. It's not 500 units. It's $500 value of 100 units. Okay so that would be the entry to Rick record this purchase return. We're decreasing our inventory, decreasing the payable. Right? So in the first example we had our inventory go up 2500. Our accounts payable up 2500. Well now we return some of it. So our inventory is going down by the 500 of what we return and our liabilities we no longer owe 2500 to them. We only owe 2000. So we're gonna lower that by 500 Notice. So if we net these two entries, the one above and this one we're gonna see that there's $2,000 worth of value in our inventory. And that's the 400 units that we still have. We still have 400. Right? We gave back 100 we started with 500. So that's that $2,000 value. The 2500 inventory from the first entry minus the 500 returned. Same thing with the accounts payable, right? We were originally gonna pay them for the 500 units. Well now we only own for 400. Cool. Alright. So let's pause here and then in the next video, let's talk about purchase allowances. Alright, let's do that now.

Alright now let's try this with the purchase allowance. So a purchase allowance. This is where we're gonna keep the goods, we're still gonna keep them, we're not gonna return them to the supplier but we're gonna get a better price. Right? Maybe they were low quality goods and we want a better price. So let's check out the example. T. O. S. Ordered 500 things on account at $5 per thing. When low quality things arrived the supplier agreed to lower the price to $2 per thing. Okay so instead of paying $5 per thing, we're now gonna pay $2 per thing. Alright so we would still be making that first entry just like we did above when we bought the 500 things, we would have made some sort of entry like inventory and uh accounts payable. Right? We would debit inventory and credit accounts payable and that was the $500. Excuse me? 500 things at $5. Well we would have made an entry to increase our inventory to 2500 and we would owe our supplier 2500. Right? That's the credit to accounts payable. But now our supplier said okay they are low quality things. So I'm gonna give you a discount down to $2. Right? So we need to lower the value of our inventory. Our inventory should be valued at $2. So it's 500 times the $2. Well that's 1000. Right? Our inventory should be valued at 1000 but it's right now valued at 2500. So we need to decrease inventory by 1500. Right? Because it's at 2500 and we want to get to 1000. So we're gonna make a second entry here for the purchase purchase allowance where we're going to debit our accounts payable right? Because we're no longer gonna owe them so much money, we don't owe them 2500. We're only going to show them the 1000 at this lower price. So we have to debit accounts payable by 1500 and credit inventory by 1500. Right? So by making this second entry it's bringing our inventory down to the $1000 value which is the 500 things at $2 per and our accounts payable down to the $1000 value, the amount that we owe to our supplier. Right. So we saw that our inventory went up 2500. Right? But then our inventory in the second entry went down 1500 that gets us to the inventory balance of 1000 and the same thing's happening in the liabilities where a P. R. Accounts payable went up by 2500 in the first entry and then down by 1502 are correct amount of 1000 at the new price of $2. Cool. So that's a purchase allowance, notice that in a purchase allowance it's because of some situation where we're still gonna keep the goods but we want a better price for the goods. All right, So let's go ahead and pause here and then move on to the next video.