Summary

Summary Purchases and Sales

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Course
Financial Accounting 1 (ACCN1010)

Institution
University Of The Witwatersrand (wits)

This document clearly illustrates the different natures of business activities, being the service and retail entities. Multiple journal entry examples are given to help understand how purchasing and selling take place on the periodic and perpetual inventory systems. Journal entries including VAT an...

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Uploaded on January 15, 2024
File latest updated on January 16, 2024
Number of pages 9
Written in 2023/2024
Type Summary

purchases and sales

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Purchases and Sales

The nature of business activities:

Service entity Retail entity
Service performed for a fee Purchases and sale of goods
Profit = Fees - operating and financing Profit = sales - cost of sales - operating and
expenses finance expenses
Does not hold a stock of goods for Holds a stock of goods for resale (inventory)
resale
May hold goods to be consumed
(supplied or inventory of supplies)

Inventory systems:

Perpetual Periodic
Account for inventory purchases and Account for inventory at the end of the period,
sales as and when they happen. like stationery.
Increased for cost of goods Cost of goods purchased in a temporary
purchased. account ("Purchases")
Decreased with goods sold. Goods sold calculated based on the movement
in inventory.
Always up to date. Smaller entities with fewer transactions.
Better inventory control.

, Examples:

• On 4 June 2015 purchased 15 items for R60 on account from Phones for
You

Perpetual DR CR Periodic DR CR
Dr Inventory (A) 900 Dr Purchases (T) 900
Cr Accounts payable 900 Cr Accounts payable 900
(L) (L)

• On 6 June 2015, sold 2 items at R100 each on credit. The cost of he two
items was R60 each.

Perpetual DR CR Periodic DR CR
Dr Accounts receivable 200 Dr Account receivable (A) 200
(A) 200 Cr Sales (I) 200
Cr Sales (I)
120 Cost of sales computed at
Dr Cost of sales (E] 120 end of period
Cr Inventory (A)

Periodic inventory system:

Cost of sales calculation
Opening inventory XXX
+ Purchases XXX
Cost of goods available for sale XXX
• Closing inventory (XXX)
Cost of sales XXX

, Closing entries - periodic system

• Opening inventory
o Inventory has debit balance representing inventory at the beginning of the
period
o Closing entry (removes beginning balance)
• Dr COS [E]
• Cr Inventory (A)

• Purchases and other costs
o Accounts have debit balances representing total costs of goods purchased
o Closing entries
• Dr COS [E]
• Cr Purchases / other costs (T)

• Closing inventory
o Inventory has 0 balance after transfer of opening inventory
o Closing inventory
• Dr Inventory (A)
• Cr COS [E]

• COS transferred to trading acc
• Dr Trading (T)
• Cr COS [E]

• Sales
o Sales account has credit balance representing revenue earned
o Closing entry
• Dr Sales (I)
• Cr Trading (T)

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