Accounting and Finance Foundations

Unit 6

Accounting and Finance Foundations Unit 6: Journalizing 501

Lesson 17.4 Inventory

Journalizing

Chapter 17Chapter 6

Student Guide

In addition to the types of financial transactions that we’ve talked about already, businesses that manufacture

or sell goods must also keep track of the cost of inventory—the products that they keep on hand—in their

accounting records. Many computerized accounting systems track inventory for you. Nevertheless, you still

need to understand how inventory is journalized.

There are two systems for accounting for inventory. The first inventory system is called a perpetual system.

When using a perpetual inventory system, you update the accounting records after every purchase or sale

of goods. Inventory is updated in the general journal and then posted into the general ledger when the

transactions occur. Let’s take a look at how inventory is journalized using a perpetual system.

If the Go-Getter Company purchases 100 units of merchandise for $100.00 on account on 01/01/20YY,

then you should make the following entry into the general journal when using a perpetual system:

01/01/20YY

Debit Credit

Merchandise Inventory $100.00

Accounts Payable $100.00

Then, the company sells 2 units for a total of $5.00 on credit on 01/15/20YY. Under the perpetual system,

you should make the following entry into the general journal when the merchandise is sold:

01/15/20YY

Debit Credit

Accounts Receivable $5.00

Sales $5.00

Cost of Goods Sold $2.00

Merchandise Inventory $2.00

Wait a minute. What’s this about Cost of Goods Sold? We haven’t come across that term before.

Cost of Goods Sold is the amount of money that a business pays for the products it sells. So, let’s

look back at the information that we have about purchasing inventory. The company paid $100 for

100 units of inventory. That means that each unit of inventory cost one dollar when it was purchased.

Then, a couple of weeks later, the company sold two of these units of merchandise. So the total cost

of goods sold is two dollars ($1.00 X 2 units = $2.00 total cost of goods sold). But, we can’t debit

cost of goods sold without crediting the same amount elsewhere. So, since we have two fewer units

of inventory than we did before the sale, we credit two dollars to merchandise inventory. In fact, using

a perpetual inventory system, the merchandise inventory account changes after each inventory-

related transaction is entered into the general journal.