Inventory Example - Merchandise Business

Here is an example of accounting process for inventory in the operating cycle of a merchandise business.

1. Purchase Merchandise Inventory
   1. Items bought for resale to customers.
   2. When INVOICE is received:
      - DEBIT-Purchases:
      
      1. Record Net of any quantity discounts
      2. Purchase Discounts – computed on Net Purchases, is a contra account to Purchases (CREDIT balance), recorded when cash is paid early.
         CREDIT – Accounts Payable
2. Purchase Returns and Allowances
   1. Contra account to purchases (CREDIT balance)
   2. When merchandise is returned or received damaged:
      1. DEBIT – A/P & CREDIT – Purchases Returns and Allowances
3. Net Purchases
   1. Purchases minus discounts minus returns and allowances
4. Transportation Cost
   1. Free on Board (FOB) governs legal title to goods shipped
      1. 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
   2. Journal Entry: DEBIT-Freight In & CREDIT – cash or accounts payable
5. Sale of Inventory
   1. Journal Entry:
      1. DEBIT – Cash or accounts receivable & CREDIT – Sales Revenue
      2. 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
6. Cost of Goods Sold (COGS)
   1. Beginning Inventory + Freight In + Purchases = Goods available for sale- Ending Inventory

Planning for your own inventory? Download a sample Cost of Goods Sold Analysis form here.

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