Question

Using the following data, record the transactions under the periodic method and then under the perpetual method. Calculate Cost of Goods under the periodic method, and make the entry to record cost of goods sold and update ending inventory. (You may find that using T-Accounts is helpful).
Jan 1 - Beginning Inventory is $100,000
Jan 3 - Inventory is purchased with a retail value of $40,000, terms 2/10, n/30
Jan 10 - Half of the inventory purchased on January 3 is returned.
Jan 12 - The amount due from the January 3 purchased is paid.
Jan 15 - Inventory is purchased with a retail value of $60,000
Jan 18 - Inventory costing $30,000 is sold for $60,000
Jan 30 - The amount due from the Jan 18 sale is received.
Jan 31 - Ending Inventory?

Answer 1

RECORDING OF TRANSACTION UNDER PERIODIC METHOD

Amt. in $ Amt in $

Jan 3 When inventory is purchased,

Purchases A/c Dr.   40,000

To Accounts Payable A/c 40,000

Jan 10 When half of the inventory purchased on Jan 3 returned

Accounts Payable A/c Dr. 20,000

To Purchase Return A/c 20,000

Jan 12 Amount due from Jan 3 Purchase paid

Accounts Payable A/c Dr. 20,000

To Cash/Bank A/c 20,000

Jan 15 Inventory Purchased with retail value of $60000/-

Purchases A/c Dr. 60,000

To Accounts Payable A/c   60,000

Jan 18 Inventory Sold

Accounts Receivable A/c Dr. 60,000

To Sales A/c 60,000

Jan 30 Amount due from Jan 18 sale realized

Cash/ Bank A/c Dr. 60,000

To Accounts Receivable A/c 60,000

Jan 31 Ending Inventory

Inventory (End of Jan) 1,50,000

Cost of Goods Sold 30,000

To Purchases 80,000

To Inventory (Beginning of Jan) 1,00,000

The formula for Cost of Goods Sold is as under:

Cost of Goods Sold = Opening inventory + Purchases - Closing Stock

In the given question: Opening Inventory : $1,00,000

Purchases : ($40,000 - $20,000(return)+$60,000) = $80,000

Closing Inventory : $1,50,000

Putting the corresponding figures in above equation, the Cost of Goods Sold = $1,00,000 + $80,000 - $1,50,000

= $30,000

Therefore the Cost of Goods Sold is $30,000

The ENDING INVENTORY is Calculated using formula : Opening inventory + Purchases - Purchase Return - Sales

Substituting with figures : $1,00,000 + $40,000 + $60,000 - $20,000 - $30,000 = $1,50,000

UNDER PERPETUAL METHOD RECORDING OF TRANSACTIONS

Amt. in $ Amt in $

Jan 3 When inventory is purchased,

Inventory A/c Dr.   40,000

To Accounts Payable A/c 40,000

Jan 10 When half of the inventory purchased on Jan 3 returned

Accounts Payable A/c Dr. 20,000

To Inventory A/c 20,000

Jan 12 Amount due from Jan 3 Purchase paid

Accounts Payable A/c Dr. 20,000

To Cash/Bank A/c 20,000

Jan 15 Inventory Purchased with retail value of $60000/-

Inventory A/c Dr.    60,000

To Accounts Payable A/c   60,000

Jan 18 Inventory Sold

Accounts Receivable A/c Dr. 60,000

To Sales A/c 60,000

Cost of Goods Sold A/c Dr. 30.000

To Inventory A/c 30,000

Jan 30 Amount due from Jan 18 sale realized

Cash/ Bank A/c Dr. 60,000

To Accounts Receivable A/c 60,000

  

transaction date	Purchases(A) (in $)	Purchase Return (B) (in $)	Inventory Sold (C) (in $)	Ending Inventory as on the date(D=Opening Inventory+A-B-C) (in $)	Cost of Goods Sold (in $)
Jan 1 Opening Inventory				1,00,000
Jan 3	40,000	20,000	0	1,20,000
Jan 15	60,000	0	0	1,80,000
Jan 18	0	0	30,000	1,50,000	30,000
Jan 31	0	0	0	1,50,000

From the above table, it is observed that the Cost of Goods Sols under Perpetual method also is $30,000 and the Ending inventory is $ 1,50,000. In Perpetual Method, the inventory and cost of goods is computed on continuous basis as and when transaction occurs.