Using the purchase transaction from May 4 and no returns, Hanlon pays the amount owed on May 10. ![]() If we take a discount for paying early, we record this discount in the merchandise inventory account since it will reduce what we paid for inventory. When paying for inventory purchased on credit, we will decrease what we owe to the seller (accounts payable) and cash. To record return of merchandise for a refund less the 2% discount. Hanlon’s journal entry for the return would be: Date For instance, if a 2% discount had been taken, the return amount would be $350 – (350 x 2%) or $343. If the company took a discount at the time it paid the account, only the net amount would be refunded. If Hanlon had already paid the account, the debit would be to Cash instead of Accounts Payable, since Hanlon would receive a refund of cash. The entry would have been the same to record a $ 350 allowance. If Hanlon returned $350 of merchandise to Smith Wholesale on May 6 before paying for the goods, Hanlon would make this journal entry: Date We will debit Accounts Payable and credit Merchandise Inventory. Both returns and allowances reduce the buyer’s debt to the seller (accounts payable) and decrease the cost of the goods purchased (inventory). Regardless of whether we have return or allowance, the process is exactly the same under the perpetual inventory system. When a buyer receives a reduction in the price of goods shipped but does not return the merchandise, a purchase allowance results. To record the payment of shipping charges.Ī purchase return occurs when a buyer returns merchandise to a seller. On May 22 Hanlon paid We Ship It $200 for shipping on the items purchased May 21. The journal entry would be: Date Let’s continue with another example from Hanlon. We will debit Inventory for the shipping cost and credit cash or accounts payable depending on if we paid it now or later. We want to constantly update the inventory balance to match what we actually paid. Under the perpetual inventory system, remember we only use 3 accounts: Cash, Inventory and Accounts Payable. On May 21, shipping terms were FOB Shipping Point meaning we, as the buyer, must pay for shipping. In our example for Hanlon, May 4 was FOB Destination and we will not have to do anything for shipping. FOB Shipping Point means the buyer is responsible for shipping and must pay and record for shipping. FOB Destination means the seller is responsible for paying shipping and the buyer would not need to pay or record anything for shipping. We learned shipping terms tells you who is responsible for paying for shipping. On May 21, we paid with cash so we do not have credit terms since it has been paid. On May 4, we realize credit terms means we have not paid for it yet but will pay for it later (accounts payable) We are offered a 2% discount but do not record it yet as we do not know if we will make the discount due date. To record the purchase of inventory with cash. To record the purchase of inventory on account. The required journal entries for Hanlon are: Date on May 21, Hanlon purchased $20,000 of merchandise for cash with shipping terms FOB Shipping Point. ![]() On May 4, Hanlon purchased $30,000 of merchandise with credit terms of 2/10, n30 and shipping terms FOB Destination.To illustrate the perpetual inventory method journal entries, assume that Hanlon Food Store made two purchases of merchandise from Smith Company. Whenever we are the buyer, use a combination of these 3 accounts only. Accounts payable is a current liability with a normal credit balance (credit to increase and debit to decrease). We will be using ONLY 3 accounts for any journal entries as the buyer:Ĭash and Merchandise Inventory accounts are current assets with normal debit balances (debit to increase and credit to decrease). Under the perpetual inventory system, remember we want to constantly update the inventory balance to match what we paid for the inventory and for what we have on hand. ![]() The following video summarizes how to journalize purchases under the perpetual inventory system.
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