Financial Accounting Study Questions

200111 Financial Accounting Applications Exam Preparation notes + Hints 2014

Week 6 Accounting For inventory ( 20 Marks)

6

INVENTORY SYSTEMS (10 Marks)

There are two systems to account for inventory: the perpetual system and the periodic system.

• perpetual system, the inventory account is updated after every inventory purchase or sale

Journal entries in a perpetual inventory system:

(1). When goods are purchased:

Inventory

GST Outlays

Accounts payable

(2). When expenses such as freight-in, insurance etc. are incurred:

Inventory

GST Outlays

Cash

(3). When goods are returned to supplier:

Accounts payable

Inventory

GST Outlays

(4). When goods are sold to customers:

Accounts receivable

Sales

GST Collections

Cost of goods sold

Inventory

(5). When goods are returned by customers:

Sales

GST Collections

Accounts receivable

Inventory

Cost of goods sold

(6). When a difference between the balance of inventory account and physical count of inventory is found:

Inventory over and short

Inventory

• periodic inventory system inventory account is not updated for each purchase and each sale. All purchases are debited to purchases account. At the end of the period, the total in purchases account is added to the beginning balance of the inventory to compute cost of goods available for sale. The ending inventory is then subtracted from the cost of goods available for sale to compute cost of goods sold. The ending inventory is computed at the end of the period by a physical count

The general formula to compute cost of goods sold under periodic inventory system is

Cost of goods sold (COGS) = Beginning inventory + Purchases – Closing inventory

Journal entries in a periodic inventory system:

(1). When goods are purchased from supplier:

Purchases

GST Outlays

Accounts payable...