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Chapter 6 Summary
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Detailed summary of Financial Accounting - Chapter 6 - Inventories, as well as notes from the lecture.
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Lecture 5:Accounting for Merchandising Operations:
- Buying and selling of goods issues: freight costs; returns and allowances; discounts.
- 2 inventory systems: periodic (inventory is only counted at the start and end of an accounting
period) and perpetual (every inventory inflow or outflow is recorded at the time of ownership
transition).
Perpetual v Periodic System:
- Perpetual inventory system: inventory account is updated – and COGS is determined – each
time an inventory item is purchased or sold.
- Periodic inventory system: inventory account is updated – and COGS is determined – at the
end of the accounting (economic) period only.
Determining COGS via Periodic System:
- COGS is calculated at the end of the period based on: beginning inventory, cost of goods
purchased, ending inventory.
- Ending inventory is determined via physical inventory (physical count).
Perpetual v Periodic Ext:
- Purchases, freight-in, purchase returns and allowance and purchase discounts are deducted
from/added to the Inventory account under a perpetual system yet, in a periodic system, these
are recorded on separate accounts.
Accounting for Merchandising Operations under a Periodic System:
- Separate (temporary) accounts for different components of cost of goods purchased:
purchases, purchase returns and allowances, purchase discounts, and freight-in.
- No Cost of Goods Sold Account.
- Sales transactions do not require a double entry. COGS and Inventory accounts are recorded
only at the end thus, only enter the journal and general ledger at the end of the period as well.
- At the end of the accounting period, after physical inspection, the change in inventory is
recorded to the Income Summary.
Closing Entries under a Periodic System:
- Expenses, reductions in revenue, purchases, and begging inventory are closed to the Income
Summary account.
- Revenue, reduction in the cost of purchases, and ending inventory are closed to the Income
Summary Account too.
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