Chapter 5 Accounting: Purchasing Inventory

Balance Sheet

Account: Inventory, asset

Merchandisers

Businesses that sell a product to customers

FOB Destination Point

Buyer takes ownership of inventory when goods arrive Seller normally pays the freight

FOB Shipping Point

Buyer takes ownership of the inventory when good's leave the seller's place of business

Accounting for Purchase inventory

Debit: Purchase Inventory Credit: Accounts Payable

Purchase Discounts

Discount for early payments 2% discount if paid within 10 days, if not, full amount due within 30 days

Purchasing Inventory

Inventory account is increased each time merchandise is purchased Vendor provides an invoice showing the quantity and cost of the items Inventory cost is also impacted by shipping costs, return of purchased items, and discounts for early payment

Inventory

Merchandise held for sale Asset account

Operating Cycle

Purchase inventory, sell inventory, collect cash from customers

Purchase returns and allowances

Purchase return: Merchandise returned by the purchaser to the supplier Purchase allowance: Seller reduces amount owed; incentive for purchaser to keep goods

Perpetual Inventory System

Record of quantity of goods is constantly updated; better control of inventory b/c of bar codes and computer scanning

Income Statement

Sales Revenue and Cost of Goods sold, expense

Periodic Inventory System

Seldom used; would be for a small business who physically and manually count their inventory of what they have sold or purchased