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Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

4. Merchandising Operations

Perpetual Inventory - Purchasing Summary

All of our purchasing information for a perpetual system in one place!


Perpetual Inventory:Purchasing Summary

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Alright so now let's summarize everything we've discussed about purchases in a perpetual system. So what we've seen is throughout a period we're gonna be purchasing inventory and selling product right? That's what's kind of happening in a merchandizing business. So at the end of the period in a in a perpetual system we have to calculate the ending balance in inventory. Okay. We want to know what is the final balance and inventory. We've been making all these journal entries as we go for the purchases for the sales in a perpetual right? We're making those entries for the cost of goods sold as we go. So we're gonna know what that should be when the when the period ends. So we're gonna use this standard base equation right? The same equation we've been using beginning plus edition minus subtraction equals ending um to to figure out the ending balance in inventory. So we start with our beginning balance, we're gonna add the additions which was the purchases. Right? We purchase more inventory and then what are we gonna subtract from the inventory account? Well those purchase discounts when we got a discount, the purchase returns and the allowances that we talked about as well. And cogs right, cost of. Good soul is also coming out of inventory. So those are all the subtractions. And generally in most questions you're not going to be dealing with purchase discounts or purchase returns and allowances. Those are usually special cases where these things come up. Okay so generally the only subtraction is cogs but you are aware of how how to deal with purchase discounts and purchase returns and allowances from the other videos. Those are also things that can decrease our inventory account in a perpetual system. Okay so let's look at all these things in a T. Account. Right? Because I think a tea account is the easiest way to think about our base equation. We would have some tea account for inventory and we would start with our beginning balance in inventory. There would be some amount that we own at the beginning of the period. Then during the period we would purchase more inventory. Right? And that would increase that's a debit right? That increases the balance of inventory. But there's gonna be the subtractions. The things that decrease inventory right? This is gonna be the purchase discounts. I put p discounts for purchase discounts, there's gonna be the purchase returns, the purchase allowances, right. All of these things are things that can decrease our our inventory account right if we bought something and then we received a discount when we paid or if we return some of it right all of these things decrease the inventory value. And then the last thing is cogs cogs is the last thing that will decrease our inventory value. And then once we calculate, okay the beginning balance we put in what we purchase subtract all these things we get to our ending balance down here right. That would be what's left at the end of the period is the ending balance. So in a perpetual system we're accounting for all these things As we go right? We're perpetually updating the inventory account. So we would know the beginning balance, we would know the purchases, we would know the purchase discounts, returns, allowances and cogs. We would know all those numbers and then we would solve for the ending balance. Cool. So let's see this example right here a company has the following inventory records from the past month. Okay. And it tells us inventory July one cogs purchases during july purchase discounts purchase returns. Right? And it asks us to calculate inventory at the end of the month. Notice nowhere in here did they tell us what the ending balance in inventory is? Right? They did tell us the ending balance and accounts payable and the beginning balance. But how is that going to affect this problem? It's not really the accounts payable doesn't really tell us anything about the inventory account per se. Just by itself. Okay. So what we're gonna do is we're gonna take the information we do know. Alright so let's go ahead. I'm gonna rewrite our t account over here for inventory and then use this one that we have in the top right corner. Um Use that as our guide as we fill out this t account. So the first thing we have is our beginning balance right on july 1st we had our beginning balance of 55,000. That's the beginning balance in the account. Cool. And then we're gonna add the purchases to the account and notice it tells us that we're purchases during July of 25,000. So we're gonna increase our inventory with those purchases perch. I'm gonna put perch okay. So those purchases increase our inventory account and we would have made some sort of debit to inventory for 25,000 and a credit to accounts payable or something like that when we purchased it. Okay. And then we're gonna have these discounts right purchase discount. So this is when we paid our suppliers quickly we got a discount and that's going to decrease the value of inventory because we paid less for the inventory. So this is purchase discounts that decreases the value of inventory, purchase returns and allowances so they sum them together. 1500 and that is our returns. I'll just put returns but that's returns and allowances there. 1500. And the last thing was cogs. Cogs is another thing that comes out of our inventory and it told us that that's 80,000 for cogs. So there we go. We've used all of these numbers right? We used all of this and then the accounts payable stuff that was just there to throw you off to give you extra information. Okay So there we go. We've got all our numbers. All that's left is to solve for our ending balance our ending balance down here and to do that. We're just gonna add our debits, Subtract our credits and see what's left over. Okay. So we started with 55,000 plus 25,000 in purchases. And then we're gonna subtract everything on the right hand side minus 6 50 minus 1500 minus 40,000. Right? And that gets us to a value of 37,000, 850. Okay. So that is the final balance in our inventory account and that's what it asks us to calculate, right? So we used all the information that we had throughout the period to calculate the ending balance. That's how it works in a perpetual system. Cool. Let's go ahead and move on to the next video.