Sales under a Perpetual System

  • Record sales using a perpetual system

 

Approaching the end of the year, here is the state of affairs as we have described them so far. We have ignored sales and other purchases in order to keep things simple, but now let’s record a sale of inventory from our stock in hand.

Inventory
Debit Credit
223,562.50
20,700.00
4,000.00
320.00
Double line 239,942.50 Double line
Inventory List
Geyer, Co.
12/19/20XX
Product ID Description Cost Quantity in Stock Total Inventory Value
A101 Wiring harness 99.00 30 2,970.00
CAB 500 HQ Speakers 58.00 500 29,000.00
CAB 600 HQ Speakers 99.00 15 1,485.00
MMM 333 GPS enabled sound system 1,255.50 65 81,607.50
Rel 5 HQ Speakers 110.00 100 11,000.00
RFS-212 GPS enabled sound system 650.00 150 97,500.00
XPS-101 GPS enabled sound system 102.375 160 16,380.00
Total Inventory Value $ 239,942.50

We’ll sell one MMM-333 sound system and nothing else, again, for illustrative purposes and to keep things simpler than they are in real life. We’ll use the gross method: we’ll sell to retail customers who use a debit or credit card, and we’ll collect 8% state and local combined sales tax.

Here is the journal entry:

JournalPage 101
Date Description Post. Ref. Debit Credit
20–
Dec 31 Checking Account 2,159.99
Dec 31       Sales Taxes Payable 160.00
Dec 31       Sales Revenue 1,999.99
Dec 31 Cost of Goods Sold 1,255.50
Dec 31       Merchandise Inventory 1,255.50
Dec 31 To record sale of MMM-333 to Paul Smith

A lot is going on here, and this entry could be two journal entries, but often it’s not. Here we’ve violated the rule of debits first and then credits, simply in order to help clarify the entry.

  1. The deposit to the checking account includes both the sales price of $1,999.99 and the sales tax collected on behalf of the taxing authority (the state, in this case). The seller is required to collect that money from the buyer and then send it to the state on the buyer’s behalf because the state doesn’t trust the buyer to fill out the forms and remit the sales and use tax. That $160 is a payable because it is not our money. We owe it to the state and the state tax enforcement agents will come after us if we don’t send it in on time.
  2. Every time we make a sale under the perpetual system of accounting, we move the cost of the item sold from the asset account Merchandise Inventory to COGS, mirroring the actual movement of the product from the shelf into the hands (and the car) of the buyer. We recognize revenue as earned (when title passes as we hand over the goods) and the expense as it matches the revenue.

Posting the journal entry updates our ledgers by removing the cost of one sound system:

Inventory
Debit Credit
223,562.50
20,700.00
4,000.00
320.00
1,255.50
Double line 238,687.00 Double line
Inventory List
Geyer, Co.
12/19/20XX
Product ID Description Cost Quantity in Stock Total Inventory Value
A101 Wiring harness 99.00 30 2,970.00
CAB 500 HQ Speakers 58.00 500 29,000.00
CAB 600 HQ Speakers 99.00 15 1,485.00
MMM 333 GPS enabled sound system 1,255.50 64 80,352.00
Rel 5 HQ Speakers 110.00 100 11,000.00
RFS-212 GPS enabled sound system 650.00 150 97,500.00
XPS-101 GPS enabled sound system 102.375 160 16,380.00
Total Inventory Value $ 238,687.00

Although we don’t use Purchases and the related contra accounts under the perpetual method, the revenue accounts are the same.

Gross Method
Periodic Method Perpetual Method
Sales Revenue—gross sales are posted here as a credit Sales Revenue—gross sales are posted here as a credit
Sales Discounts (Contra Account)—sales discounts are posted here as a debit Sales Discounts (Contra Account)—sales discounts are posted here as a debit
Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit
Net Method
Periodic Method Perpetual Method
Sales Revenue—net sales are posted here as a credit Sales Revenue—net sales are posted here as a credit
Sales Discounts Forfeited—sales discounts not claimed by the customer are posted here as a credit Sales Discounts Forfeited—sales discounts not claimed by the customer are posted here as a credit
Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit Sales Returns and Allowances (Contra Account)—sales returns and allowances are posted here as a debit

Next, we’ll see how the perpetual method can be used for inventory control.