Merchandise accounting entails recording of sales transactions that involve inventory. Large companies often use a computerized accounting system that automatically updates the general ledger for these transactions. Smaller businesses, however, may rely on an accountant to post these entries into the ledger. A basic entry is necessary to record inventory sales into the general ledger.
Double-entry accounting requires a debit and credit in each entry. This allows companies to maintain a balance in their accounting books using the accounting equation. For an inventory sales entry, accountants will debit cost of goods sold and credit inventory. A second entry debits cash or accounts receivable and credits sales. The first entry is at the inventory’s cost while the second is at the price a customer pays for the goods.
Alternate Journal Entries
Companies that offer discounts or allowances need to account for these when recording inventory sales entries. Discounts represent one-time inventory price reductions. Allowances include price changes for volume sales, among other things. The second entry listed above will change slightly. Accountants will debit cash or accounts receivable, purchases discounts or allowances and credit sales for the net figure.
Companies can use a few different methods to value their current inventory. First in, first out and last in, first out are two common methods. First in, first out, FIFO, requires companies to move the oldest inventory cost to cost of goods sold; last in, first out, LIFO, is the opposite. Newer inventory costs move to cost of goods sold first. Each method affects the company’s ending inventory balance differently.
The perpetual inventory method records both inventory sales journal entries listed above as they occur. The periodic method does not record the first entry for every sale, however. Accountants wait to move the inventory cost of goods sold until the end of the month. This avoids posting numerous entries each time they occur, saving time for accountants. Instead, the periodic method makes one lump-sum transfer from inventory to cost of goods sold at month end.