WEYGANDT – KIESO - KIMMEL – TRENHOLM – WARREN - NOVAK

ACCOUNTING
PRINCIPLES
KEY TOPICS
VOLUME 1
SEVENTH CANADIAN EDITION

Prepared by Angela Davis, CA, CFE, MSc

Booth University College
 KEY TOPICS: CHAPTER 5
ACCOUNTING FOR MERCHANDISING
OPERATIONS

Perpetual Inventory System

2
 Perpetual Inventory System

Key Points:
1. A merchandising company must keep track of
what it has available for sale (inventory) and
what it has sold (cost of goods sold).
2. Inventory is a current asset and therefore is found
on the balance sheet.
3. Cost of goods sold is an expense account and is
therefore found on the income statement.
4. In a perpetual inventory system, the inventory
account is constantly updated as products are
purchased and sold.
 Sample Data – Perpetual Inventory

On Feb 3, Games Unlimited purchased 100 copies of a new

computer game for $3,000 from its supplier for cash. The journal
entry to record the purchase would be:
Cash Inventory
Dat Account Debit Credi * 5,000 3,000 3,000
e t
Feb Inventory 3,000
3
Cash 3,000
to record purchase of
games
(* The cash balance prior to posting this transaction was $5,000.)

After the entry is posted into the T accounts, the asset account,
inventory, reflects the goods available to sell to customers. Since
$3,000 was paid for 100 copies of the game, each game must have cost
$30 ($3,000 ÷ 100 games).
 Sample Data – Perpetual Inventory

On Feb 10, Games Unlimited sells 10 copies of the new computer

game for $70 each. Two journal entries are required. (i) to record
the sale and (ii) the corresponding cost of goods sold, as follows:
Date Account Debit Credit Cash Inventory
Feb 10 Cash 700 5,000 3,000 3,000 300

Sales revenue 700 700 2,700

to record sale of 10 games

Feb 10 Cost of goods sold 300 Sales Cost of goods sold

700 300
Inventory 300
to record cost of goods sold

Revenues are valued based on the retail price of $70 each while the cost of goods sold is
valued based on the cost price of $30 each. The balance remaining in the inventory account
reflects the 90 copies at $30 each.
 Sample Data – Perpetual Inventory

The income statement after these transactions have

been recorded would appear as follows:

      Income Statement 
   

  Revenue       $ 700  

  Cost of goods sold      300  

$
    Gross profit       400  
                 

The gross profit indicates the amount of income earned

by the company because they sold products.
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