Purchase Merchandise Inventory
A. Items bought for resale to customers.
B. When INVOICE is received:
- DEBIT-Purchases:
a. Record Net of any quantity discounts
b. Purchase Discounts – computed on Net
Purchases, is a contra account to Purchases
(CREDIT balance), recorded when cash is paid
early.
CREDIT – Accounts Payable
Purchase Returns and Allowances
A. Contra account to purchases (CREDIT balance)
B. When merchandise is returned or received
damaged:
a. DEBIT – A/P & CREDIT – Purchases
Returns and Allowances
Net Purchases
A. Purchases minus discounts minus returns and
allowances
Transportation Cost
A. Free on Board (FOB) governs legal title to
goods shipped
a. FOB Shipping
Title passes when inventory placed on
the carrier
BUYER pays shipping cost
FOB Destination
Title passes when inventory received
by the buyer
SELLER pays shipping cost.
B. Journal Entry: DEBIT-Freight In & CREDIT
– cash or accounts payable
Sale of Inventory
A. Journal Entry:
a. DEBIT – Cash or accounts receivable
& CREDIT – Sales Revenue
b. Sales Discounts, Returns and Allowances,
CONTRA: accounts to Sales Revenue
When company receives a returned good
DEBIT – Sales Returns and Allowances
& CREDIT – A/R.
Net Sales = Sales Revenue minus Sales
Discounts minus Sales Returns and Allowances
Cost of Goods Sold (COGS)
A. Beginning Inventory + Freight In + Purchases
= Goods available for sale- Ending Inventory
