Inventory

 inventory as a company's goods on hand, which is often a significant current

assets. Inventory serves as a buffer between a company's sales of goods and
its production or purchase of goods.
 Companies strive to find the proper amount of inventory to avoid lost sales,
disruptions in production, high holding costs.
 A company's cost of inventory is related to the company's cost of goods sold
that is reported on the company's income statement
Physical inventory

 The physical inventory simply means the actual, real, tangible, touchable
stuff the company has for resale. In the case of a manufacturing company,
the physical inventory includes raw materials, the value of goods in the
process of production, and the value of finished goods.
 Taking a physical inventory means counting the number of units of stuff you
have for sale. This is usually done at the end of the year, so the balance sheet
Inventory amount accurately reflects the true value of the ending physical
inventory
Perpetual Inventory System, Periodic
Inventory System
Perpetual Inventory System

 In perpetual inventory system merchandise inventory and cost of goods sold

are updated continuously on each sale and purchase transaction.
 Some other transactions may also require an update to inventory account for
example, sale/purchase return, purchase discounts etc. Purchases are
directly debited to inventory account whereas for each sale two journal
entries are made: one to record sale value of inventory and other to record
cost of goods sold
 Purchases account is not used in perpetual inventory system.
 In a Perpetual system, inventory account balances are updated after each
sale. This type of system is much more complex. Scanning cash registers, bar
coded merchandise, and similar devices are used to update the inventory
records after each sale
periodic inventory system

 In periodic inventory system, merchandise inventory and cost of goods sold

are not updated continuously. Instead purchases are recorded in Purchases
account and each sale transaction is recorded via a single journal entry.
 Thus cost of goods sold account does not exist during the accounting period.
 In a Periodic system, inventory account balances are updated once a year
(some companies may do it more often, but all must do so at least once per
year)
Differences between perpetual and
periodic inventory systems
 Inventory Account and Cost of Goods Sold Account :are used in both systems but
they are updated continuously during the period in perpetual inventory system whereas
in periodic inventory system they are updated only at the end of the period
 Purchases Account and Purchase Returns and Allowances Account are only used in
periodic inventory system and are updated continuously. In perpetual inventory system
purchases are directly debited to inventory account and purchase returns are directly
credited to inventory account.

 Sale Transaction is recorded via two journal entries in perpetual system. One of them
records the sale value of inventory whereas the other records cost of goods sold. In
periodic inventory system, only one entry is made
 Closing Entries are only required in periodic inventory system to update inventory and cost of
goods sold. Perpetual inventory system does not require closing entries for inventory account
Cash Discounts

 A cash discount is an incentive that a seller offers to a buyer in return for

paying a bill owed before the scheduled due date. The seller will usually
reduce the amount owed by the buyer by a small percentage or a set dollar
amount. If used properly, cash discounts improve the days-sales-outstanding
aspect of a business's cash conversion cycle.
 A cash discount is a reduction in the amount of an invoice that the seller
allows the buyer. This discount is given in exchange for the buyer paying the
invoice earlier than the normal payment date of the invoice.
 A seller uses cash discounts if he wants faster access to cash from buyers,
which may be critical if the seller has little cash on hand, or is simply trying
to reduce his working capital investment in accounts receivable.
Why the seller give cash Discount

 To obtain earlier use of cash, which may be necessary if the seller is short of
cash
 To offer a discount for an immediate cash payment in order to entirely avoid
the effort of billing the customer
Credit

 Credit is a contractual agreement in which a borrower receives something of

value now and agrees to repay the lender at some date in the future,
generally with interest. Credit also refers to an accounting entry that either
decreases assets or increases liabilities and equity on the company's balance
sheet. Additionally, on the company's income statement, a debit reduces net
income, while a credit increases net income
Credit terms

Inaccounting, a credit is an entry recording a sum that has been received. Traditionally,
credits appear on the right-hand side of the column with debits on the left. For example, if
someone is tracking his spending in a checking account register, he records deposits as
credits, and he records money spent or withdrawn from the account as debits.

Creditterms are terms which govern a credit sale. They represent an arrangement between
a buyer and a seller regarding the expected payment date, any discount offered and the
period in which discount is available

Credit terms are expressed as x/y, net z where x is the percentage discount that is offered,
y is the number of days in which the discount can be availed and z is the credit period
Types of credit

 There are many different forms of credit. When banks offer their clients car loans,
mortgages, signature loans and lines of credit, those are all forms of credit. Essentially,
the bank has credited money to the borrower, and the borrower must pay it back at a
future date.
 For example, when someone makes a purchase at his local mall with his VISA card, his
payment is considered a form of credit because he is buying goods with the
understanding that he needs to pay for them later
Credit limit

 Credit limit refers to the maximum amount of credit a financial institution

extends to a client through a line of credit as well as the maximum amount a
credit card company allows a borrower to spend on a single card. Lenders
usually set credit limits based on information in the application of the person
seeking credit
 Whether a borrower has a line of credit or a credit card, the credit limit
works the same. Essentially, the borrower may spend up to the credit limit,
but if he exceeds that amount, he typically faces fines or penalties in
addition to his regular payment. If he has spent less than the limit, he can
continue to use the card or line of credit until he reaches the limit.