Accounting Principle – Grade 1 - FCASU – 2nd Term

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Accounting Principles

2nd Term (English Commerce – AinShams University)

Year 2021 / 2022

Online Fintech Group

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 Accounting Principle – Grade 1 - FCASU – 2nd Term

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2nd Term
Continue of Chapter 5
Record purchases and sales under a periodic inventory system
As described in first term, companies may use one of two systems of accounting for inventories:
(1) The perpetual inventory system
(2) The periodic inventory system.

First difference between the two systems is ➔ how Cost of goods sold compute under 2 systems.

Determining Cost of Goods Sold:

- A company using a perpetual system makes an entry to record cost of goods sold (“Debit”) and
to reduce inventory (Assets Decrease “Credit”) each time a sale is made.

Sale of Inventory entry (Under Perpetual System)

Cost of Goods Sold xx
Inventory xx
- A company using a periodic system does not determine cost of goods sold until the end of the period.
- At the end of the period, the company performs a count )‫ (جرد للمخزون‬to determine the ending of
inventory. It then calculates cost of goods sold by subtracting ending inventory from the cost of goods
available for sale (Beginning Inventory + Purchases).

- The cost of goods sold = Cost of goods available for sale – Ending Inventory
= (Beginning Inventory + Cost of Goods Purchased) - Ending Inventory

Second difference between the Perpetual and Periodic system is that:

- Perpetual system ➔ adjusts the Inventory account for any transaction that could affects
inventory (such as freight costs, returns, and discounts).
- In periodic system does not do this, it creates different accounts (Purchases, freight costs,
returns, and discounts)

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Recording Merchandise Transactions
(1) Purchase of Merchandise Under Periodic and Perpetual System
- Under a Periodic system, companies record purchases of merchandise in the Purchases account
while in Perpetual System it recorded in Inventory account.
- Assume that company purchase merchandise by $ 3,800 on credit, the following discribe the
difference in recorded under (Period and Perpetual) system

(2) Purchase Return, Purchase Discount and Freight Cost “Transportation In” Under Periodic
and Perpetual System
- In a Periodic system, purchase returns and allowances, purchase discounts, and freight costs on
purchases are recorded in separate accounts.
- In Perpetual System, it will effect the inventory account directly
- Assume that the company’s purchases has a freight cost by $ 150, and company found defective
merchandise $ 300, while it paid the amount during discount period and enjoyed $ 70.

(3) Sale of Merchandise Under Periodic and Perpetual System

- Recording Sale of Merchandise under Periodic and Perpetual Inventory System are the same,
while Cost of Goods Sold are not the same under Periodic and Perpetual.
- In Perpetual System, as we discussed before in first term, when we record sale of merchadise
(Revenue) we should recognize its Cost of good sold in same entry (in the date of merchandise
sale) ➔ 2 entries are recognized (Sale entry and Cost of good sold entry)
- While under Periodic System, Cost of Merchaindse sold is determined after a physical inventory
count at the end of the period and determine the difference between goods available for sale
and Ending Inventory
The cost of goods sold = (Beginning Inventory + Purchases) - Ending Inventory
- Assume that company recorded sale by $ 3,800 sold on credit, which its purchase cost was $ 2,400

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 Accounting Principle – Grade 1 - FCASU – 2nd Term

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(4) Sale Return and Sales Discount Under Periodic and Perpetual System
- Recognize Sale Return and Sales Discount are the same (Sale price entry) in Periodic and
Perpetual system except the treatment of Inventory & Cost of goods sold (Cost price entry) in
case of Sales Return
- As we discussed earlier in Chapter 5 in first term, Under Perpetual System, and in case of Sales
Return, we should recognize the goods return to seller (Sales Return and Allowance) in addition
to recognize its cost as it returned back to its inventory (“Debit” Inventory, and “Credit” Cost of
Goods Sold)
- Under Periodic System, Only recognize the Sales Return account (Debit) and (Credit) Account
Receivable in case of Credit Sales or Cash in case of Cash Sale, while No entry will be recognized
during return of transaction related to goods returned (Goods returned will be exist in ending
inventory at the end of accounting period and will be consider in count process(.

Example (1)
Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and
events occurred as follow:
- May 13 Purchased 6 motors at a cost of $45 each from Charlie Company, with credit
terms (4/10, n/30).
- May 16 Returned 1 defective motor to Charlie.
- May 23 Paid Charlie Company in full.

Instructions
Journalize the May transactions for Scruffy Brothers (Buyer).

Answer:
General Journal
Date Account Title Debit Credit
May 13 Purchases (6 x $45) $ 270
Account Payable $ 270
May 16 Account Payable $ 45
Purchase Return and Allowance $ 45
May 23 Account Payable (270 – 45) $ 225
Purchase Discount $9
Cash $ 216
- The amount paid within last day of discount (10 days) and got
discount 4%
- Discount calculated net of return = (270 – 45) x 4% = $ 9

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 Accounting Principle – Grade 1 - FCASU – 2nd Term

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Example (2)
Prepare the necessary journal entries to record the following transactions, assuming a periodic
inventory system:
1. Purchased $450,000 of merchandise on account, terms 2/10, n/30.
2. Returned $30,000 of damaged merchandise for credit.
3. Paid for the merchandise purchased within 10 days.
Answer:
General Journal
No Account Title Debit Credit
1 Purchases $ 450,000
Account Payable $ 450,000
2 Account Payable $ 30,000
Purchase Return and Allowance $ 30,000
3 Account Payable (450,000 – 30,000) $ 420,000
Purchase Discount $ 8,400
Cash $ 411,600
- The amount paid within last day of discount (10 days) and got
discount 2%
- Discount calculated net of return
= (450,000 – 30,000) x 2% = $ 8,400

Example (3)
Paxson Supply Company uses a periodic inventory system. During September, the following
transactions and events occurred.
- Sept. 3 Purchased 80 backpacks at $30 each from Barnes Company, terms 2/10, n/30.
- Sept. 6 Received credit of $150 for the return of 5 backpacks purchased on Sept. 3 that
were defective.
- Sept. 9 Sold 15 backpacks for $40 each to Starr Books, terms 2/10, n/30.
- Sept. 13 Paid Barnes Company in full.

General Journal
Date Account Title Debit Credit
Sep. 3 Purchases (80 x $30) $ 2,400
Account Payable $ 2,400
Sep. 6 Account Payable $ 150
Purchase Return and Allowance $ 150
Sep. 9 Account Receivable $ 600
Sales Revenue (15 x $40) $ 600
Sep. 13 Account Payable ($2,400 – $150) $ 2,250
Purchase Discount $ 45
Cash $ 2,210
- The amount paid within last day of discount (10 days) and got
discount 2%
- Discount calculated net of return = (2,400 – 150) x 2% = $ 45

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 Accounting Principle – Grade 1 - FCASU – 2nd Term

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Exercise (5):
The following information is available for Hopkins Company:
Beginning inventory $ 45,000
Ending inventory 70,000
Freight-in 10,000
Purchases 270,000
Purchase returns and allowances 8,000
Instructions
Compute each of the following:
(a) Net purchases
(b) Cost of goods purchased
(c) Cost of goods sold

Answer:

(a) Net Purchase = Purchases – Purchase Return & Allowance

= $270,000 - $8,000 = $262,000
(b) Cost of Goods Purchased = Net purchases + Fright In
= $262,000 + $10,000 = $272,000
(c) Cost of Goods Sold = Beg. Inventory + Cost of Goods Purchases – Ending Inventory
= $45,000 + $272,000 - $70,000 = $247,000

Exercise (6)
Select the correct answer
1) In determining cost of goods sold under a periodic system:
a. Purchase discounts are deducted from net purchases.
b. Freight-out is added to net purchases.
c. Purchase returns and allowances are deducted from net purchases.
d. Freight-in is added to net purchases
(Answer is: D)

2) If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is
$50,000, cost of goods sold is:
(a) $390,000. (c) $330,000.
(b) $370,000. (d) $420,000.
(Answer is: A)
Cost of Goods Sold = Beg. Inv. + Purchase – Ending Inventory =
60,000 + 380,000 – 50,000 = $390,000
3) When goods are purchased for resale by a company using a periodic inventory system:
a. Purchases on account are debited to Inventory.
b. Purchases on account are debited to Purchases.
c. Purchase returns are debited to Purchase Returns and Allowances.
d. Freight costs are debited to Purchases
(Answer is: B)

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