Perpetual Inventory System Journal Entries

Under perpetual inventory system, inventory and cost of goods sold are updated for each sale/purchase and return transaction. We have already discussed the basic concept of perpetual inventory system in the comparison of perpetual-periodic inventory. Here we will learn the journal entries which are typical to a perpetual inventory system:

Following are the journal entries under perpetual inventory system assuming that sales and purchases are recorded net of discount (to learn more, see gross vs net method of inventory purchase recording and discount on sales.).

Inventory Purchase:
Under perpetual inventory system, a purchase is recorded by debiting inventory account and crediting accounts payable assuming that the purchase is on credit. The journal entry is shown below:

Inventory— —
Accounts Payable— —

Purchase Discount:
Purchase discount will reduce the inventory directly. Thus:

Accounts Payable— —
Inventory— —

Purchase Return:
When inventory purchased is subsequently returned to the supplier, the journal entry is to debit accounts payable or accounts receivable and credit inventory account.

Accounts Receivable/Accounts Payable— —
Inventory— —

Inventory Sale:
A transaction of sale is recorded via two journal entries in perpetual inventory system. The first one records the sale value of inventory and the second one records the cost of goods sold and reduces the inventory balance. The two journal entries are shown below:

Accounts Receivable— —
Sales— —
Cost of Goods Sold— —
Inventory— —

Sales Return:
The recording of sales return also requires two journal entries. Which are shown below:

Sales Returns— —
Accounts Receivable/Accounts Payable— —
Inventory— —
Cost of Goods Sold— —

Written by Irfanullah Jan