Perpetual Inventory Journal Entry

Perpetual inventory is the system that records the movement of inventory account the time the company purchase or sells inventory.

Asset is anything that has value and can be converted into cash. Inventory is a type of asset because the company can sell it for money. An item could be anything, even a piece of jewelry and other items that has physical substance or digital. Inventory is the items that companies sell to generate revenue. It includes the raw material, work in progress, and finished goods. Inventory is important because it helps a business track what items are being held or circulated by the company, and how much money each item is worth.

There are two methods that company can use to record the inventory, it is periodic and perpetual inventory. Periodic is the accounting record that adjusts the inventory balance at the end of the month after conducting the physical count. The purchase and sale of inventory will impact the temporary account. These transactions will be adjusted at the month-end.

On the other hand, the perpetual inventory system will record all the purchases and sales into the inventory account. The movement of inventory will impact the inventory account immediately. There is no month-end adjustment to be made. The purchase will increase the inventory and the sale will decrease its balance.

The perpetual inventory system is very straightforward. When the company purchases new inventory, accountant has to record it directly into the inventory account. When the company makes the sale, the amount of inventory on balance sheet will reduce immediately.

Journal Entry

When the company purchases inventory, they have to record inventory and accounts payable. The journal entry is debiting inventory and credit accounts payable.

The transaction will increase the inventory on the balance sheet and credit accounts payable if the company has not yet made payment.

If there are any purchase discounts or purchase returns, it will directly reduce the inventory account as well as the accounts payable. The journal entry is debiting accounts payable and credit inventory.

It simply directly reduce the inventory from balance sheet and revere accounts payable. Sale of inventory

Under a perpetual inventory system, when we sell the inventory, we have to record sale revenue into the income statement. Moreover, we have to record inventory and cost of goods sold as well. The first journal entry is debiting accounts receivable or cash and credit sales revenue.

The company has recorded the sales revenue into the income statement and recognizes cash or accounts receivable. When the inventory is sold to the customer, company has to remove it from the balance sheet and record the cost of goods sold. The journal entry is debiting cost of goods sold and credit inventory.

If there are any sales returns, seller has to reverse both transactions above.

It will remove the sales revenue from income statement and decrease accounts receivable.

The transaction also increases the inventory back on the balance sheet.

Example

ABC is a trading company, during the month, the company has made the following transaction:

• Purchase inventory cost $ 20,000 on credit
• Return inventory cost $ 1,000 due to quality issue
• Sale inventory for $ 30,000 on credit, the cost of these inventories is $ 15,000.

Please prepare journal entries for these transactions as the company uses a perpetual inventory system.

When the company purchases inventory on credit, they have to record inventory and accounts payable. The journal entry is debiting inventory $ 20,000 and credit accounts payable $ 20,000.

After the purchase, company has returned some inventory cost of $ 1,000. So company has to remove inventory from balance sheet and decrease the accounts payable. The journal entry is debiting accounts payable $ 1,000 and credit inventory $ 1,000.

When the company sale the inventory for $ 30,000 on credit, they have to record sales revenue and accounts receivable. The journal entry is debiting accounts receivable $ 30,000 and credit sales revenue $ 30,000.

At the same time, they have to record cost of goods sold and inventory. The journal entry is debiting COGS $ 15,000 and credit inventory $ 15,000.