Inventory Management: Costing Methods & Journal Entries

Posted on Apr 26, 2024 in Mathematics

Perpetual Inventory System

The perpetual inventory system continuously updates inventory records to reflect purchases, sales, and returns.

Inventory Costing Methods

Gross Profit Method

Estimates the cost of goods sold based on the gross profit percentage and net sales.

Specific Identification

Tracks the cost of each individual item sold and remaining in inventory.

Weighted-Average Method

Calculates the average cost per unit and applies it to both cost of goods sold and ending inventory.

First-In, First-Out (FIFO)

Assumes that the first items purchased are the first ones sold.

Last-In, First-Out (LIFO)

Assumes that the last items purchased are the first ones sold.

Journal Entries

Purchase on Account

Debit Merchandise Inventory and credit Accounts Payable.

Sale on Account

Debit Accounts Receivable and credit Sales Revenue. Debit Cost of Goods Sold and credit Merchandise Inventory.

Special Journals

Cash Receipts Journal

Records all cash received by the business.

Cash Payments Journal

Records all cash paid out by the business.

Purchases Journal

Records all purchases of merchandise on account.

Sales Journal

Records all sales of merchandise on account.

Retail Method of Inventory Estimation

Estimates the cost of ending inventory based on the ratio of cost to retail price.

Accounting Principles

Consistency

Using the same accounting methods from period to period for comparability.

Conservatism

Anticipating and accounting for potential losses, but not gains.

Natural Business Year

A fiscal year that aligns with the natural cycle of the business, often ending when inventory is lowest.