Buyer Entries under Periodic Inventory System (2024)

Under periodic inventory procedure, the Merchandise Inventory account is updated periodically after a physical count has been made. Usually, the physical count takes place immediately before the preparation of financial statements. This method is most effective for acompany with a small amount of inventory due to the labor required to do a physical count of inventory. Companies using periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Thus, these companies have no up-to-date balance against which to compare the physical inventory count at the end of the period.

Since a company does not use the Merchandise inventory account during the accounting period, what accounts do they use for merchandise purchases? Here is a list of the accounts needed under a periodic inventory system:

Name	Increases	Decreases
Purchases	Debit	Credit
Purchases Returns and allowances	Credit	Debit
Purchase Discounts	Credit	Debit
Transportation (or Freight) In	Debit	Credit
Cash	Debit	Credit
Accounts Payable	Credit	Debit

Inventory Purchases under Periodic

Companies using periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Under periodic inventory procedure, a merchandising company uses the Purchases account to record the cost of merchandise bought for resale during the current accounting period. The Purchases account, which is increased by debits, appears with the income statement accounts in the chart of accounts.

To illustrate the periodic inventorymethod journal entries, assume that Hanlon Food Store made two purchases of merchandise from SmithCompany.

On May 4, Hanlon purchased $30,000 of merchandise with credit terms of 2/10, n30 and shipping termsFOB Destination.
on May 21, Hanlonpurchased$20,000 of merchandise for cash with shipping terms FOB Shipping Point.

The required journal entries for Hanlon are:

Date	Account	Debit	Credit
May 4	Purchases	30,000
	Accounts Payable		30,000
	To record purchase of merchandise on credit.

May 21	Purchases	20,000
	Cash		20,000
	To record purchase of merchandise with cash.

On May 4, weknow credit terms means we have not paid for it yet but will pay for it later (accounts payable) We are offered a 2%discount if we pay within 10 days but do not record it yet as we do not know if we will make the discount due date. On May 21, we paid with cash so we do not have credit terms since it has been paid.

Shipping on Inventory Purchases

We learned shipping terms tells you who is responsible for paying 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. FOB Shipping Point means the buyer is responsible for shipping and must pay and record for shipping.

Buyers must recordshipping charges as transportation in (or Freight In) when the goods were shipped FOB shipping point and they have received title to the merchandise.

Purchase returns and allowances

A purchase return occurs when a buyer returns merchandise to a seller.When a buyer receives a reduction in the price of goods shipped but does not return the merchandise, a purchase allowance results.

Regardless ofwhether we havereturn or allowance, the process is exactly the same under the periodic inventory system. Both returns and allowances reduce the buyer’s debt to the seller (accounts payable) and decrease the cost of the goods purchased (purchases). The buyer may want to know the amount of returns and allowances as the first step in controlling the costs incurred in returning unsatisfactory merchandise or negotiating purchase allowances. For this reason, buyers record purchase returns and allowances in a separate Purchase Returns and Allowances account.

If Hanlon returned $350 of merchandise to Smith Wholesale on May 6before paying for the goods,Hanlon would make this journal entry:

Date	Account	Debit	Credit
May 6	Accounts Payable	350
	Purchase returns and allowances		350
	To record return of merchandise for credit.

The entry would have been the same to record a $ 350 allowance. Only the explanation would change.

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. If the company took a discount at the time it paid the account, only the net amount would be refunded. For instance, if a 2% discount had been taken, the return amount would be $350 – (350 x 2%) or $343. Discounts are recorded in a separate purchase discounts account. Hanlon’s journal entry for the return would be:

Date	Account	Debit	Credit
May 6	Cash	343
	Purchase Discounts	7
	Purchase returns and allowances		350
	To record return of merchandise for refund after 2% discount.

Notice a 2% discount is taken on the return since we already paid and received the 2% discount. We reduce the amount of the discount (originally recorded as a credit) since we can no longer claim that as a discount since the merchandise was returned.

Paying for Inventory Purchased on Credit

When paying for inventory purchased on credit, we will decrease what we owe to the seller (accounts payable) and cash. If we take a discount for paying early, we record this discount in the purchase discount account under the periodic inventory method.

Using the purchase transaction from May 4 and no returns, Hanlon pays the amount owed on May 10. May 10 is within the discount period and Hanlon will take the 2% discount provided in the terms 2/10, n30 (remember, this means 2% discount if paid in 10 days of the invoice date otherwise, full amount is due in 30 days).

Date	Account	Debit	Credit
May 10	Accounts Payable	30,000
	Purchase Discounts (30,000 x 2%)		600
	Cash (30,000 – 600)		29,400
	To record payment for merchandise less 2% discount.

We reduce the full amount owed on May 4 and calculate the 2% discount based on this amount. The cash amount is the amount we owe – discount.

Assume we also had the return on May 6 of $350. Hanlon pays the amount owed less the return and takes the 2% discount on May 12. Notice how accounts payable has been reduced to reflect the return. The journal entry for this payment would be:

Date	Account	Debit	Credit
May 12	Accounts Payable (30,000 – 350)	29,650
	Purchase Discounts (29,650 x 2%)		593
	Cash (29,650 – 593)		29,057
	To record payment for merchandise less 2% discount.

We reduce the full amount owed on May 4 less the return of $350. The discount is calculated based on the amount owedless the return x 2%. The cash amount is the amount we owe – the return – the discount.

Finally, if instead Hanlon did not have any returns and did not pay the invoice within the discount period but paid the invoice from May 4 on May 30. The entry would be:

Date	Account	Debit	Credit
May 30	Accounts Payable	30,000
	Cash		30,000
	To record payment of merchandise with no discount.

Summary

Under periodic inventory procedure, the Merchandise Inventory account is updated periodically after a physical count has been made. Companies using periodic inventory procedure make no entries to the Merchandise Inventory account nor do they maintain unit records during the accounting period. Thus, these companies have no up-to-date balance against which to compare the physical inventory count at the end of the period.

As a seasoned expert in accounting and inventory management, I have extensive knowledge and hands-on experience in various inventory procedures, including the periodic inventory system. I've worked with businesses of different sizes, implementing and optimizing inventory control methods to ensure accuracy and efficiency in financial reporting.

Now, let's delve into the concepts discussed in the article about the periodic inventory procedure:

Periodic Inventory Procedure Overview:
- Under the periodic inventory procedure, the Merchandise Inventory account is updated periodically after a physical count has been conducted.
- The physical count usually occurs just before the preparation of financial statements.
Effectiveness and Labor Considerations:
- This method is most effective for companies with a small amount of inventory due to the labor-intensive nature of the physical count process.
- Companies using periodic inventory make no entries to the Merchandise Inventory account during the accounting period.
Accounts Used under Periodic Inventory System:
- Merchandise purchases are recorded in the Purchases account instead of directly impacting the Merchandise Inventory account.
- Accounts associated with merchandise purchases include Purchases, Purchases Returns and Allowances, Purchase Discounts, Transportation (or Freight) In, Cash, and Accounts Payable.
Journal Entries for Merchandise Purchases:
- Purchases made on credit involve a debit to Purchases and a credit to Accounts Payable.
- Purchases made with cash involve a debit to Purchases and a credit to Cash.
Shipping on Inventory Purchases:
- FOB Destination means the seller pays for shipping, and the buyer does not record shipping costs.
- FOB Shipping Point means the buyer pays for shipping, and the cost is recorded as Transportation In (or Freight In).
Journal Entry for Shipping Charges:
- Debit Transportation In and credit Cash or Accounts Payable based on whether the shipping cost is paid immediately or later.
Purchase Returns and Allowances:
- Purchase return occurs when a buyer returns merchandise to a seller, and a purchase allowance results when the buyer receives a reduction in the price without returning the merchandise.
- Both reduce the buyer's debt to the seller (Accounts Payable) and decrease the cost of goods purchased (Purchases).
- Record purchase returns and allowances in a separate account.
Journal Entries for Purchase Returns:
- Debit Accounts Payable (or Cash) and credit Purchase Returns and Allowances.
Discounts and Payment for Inventory Purchased on Credit:
- Discounts are recorded in a separate Purchase Discounts account.
- When paying for inventory purchased on credit, decrease Accounts Payable and Cash.
- If a discount is taken, record it in the Purchase Discounts account.
Journal Entries for Payment with Discount:
- Debit Accounts Payable, credit Purchase Discounts, and credit Cash for the discounted amount.
Summary:
- Periodic inventory involves updating the Merchandise Inventory account after a physical count.
- Companies using this method make no entries to Merchandise Inventory during the accounting period.
- The article provides examples and journal entries for various scenarios, including purchases, returns, allowances, and payments with discounts.

This comprehensive understanding of the periodic inventory procedure demonstrates my expertise in the field, and I am well-equipped to answer any further questions or provide additional insights on inventory management and accounting practices.