Journal entries for inventory purchases and sales

Introduction

In merchandising business, we purchase the inventory goods from suppliers and sell them to our customers for a profit. Likewise, we will need to make the journal entry for the inventory purchases to account for the increase in the inventory balance under the perpetual inventory system.

Of course, if we use the periodic inventory system, we will record the inventory purchases to the temporary purchases account instead in order to add the purchases to the calculation of the cost of goods sold at the end of the accounting period.

On the other hand, we will make the journal entry for inventory sales in order to account for the increase of the sales revenue regardless of whether we make the inventory sales on credit or in cash. And if we use the perpetual inventory system, we will also need to make the journal entry to record the cost of goods sold in order to transfer the cost of inventory to the cost of goods sold account after the inventory sales occur.

Inventory purchases and inventory sales are considered the most important parts in the operating cycle of the merchandising business. Likewise, the merchandising business will have many inventory purchases and sales transactions during the accounting period.

Journal entry for inventory purchases

We can make the journal entry to record the inventory purchases by debiting the purchases account and crediting the accounts payable or cash account if we use the periodic inventory system.

Periodic inventory system:

Account	Debit	Credit
Purchases	$$$
Accounts payable/cash		$$$

In this journal entry, the purchases account is a temporary account in which its normal balance is on the debit side. And this account will be cleared when we close the company’s accounts at the end of the period. Likewise, this journal entry will not directly increase the balance of the inventory on the balance sheet.

On the other hand, if we use the perpetual inventory system, we can make the journal entry to record inventory purchases by debiting the inventory account instead of the purchases account and crediting the accounts payable or cash account.

Perpetual inventory system:

Account	Debit	Credit
Inventory	$$$
Accounts payable/cash		$$$

This journal entry will immediately increase the inventory balance on the balance sheet as a result of recording the purchases to the inventory directly.

Inventory purchases example

For example, on January 1, we make $10,000 purchases of inventory from one of our suppliers on credit. Later, on February 1, we make the $10,000 cash payment to settle this credit purchase.

In this case, we can make the journal entry to record the $10,000 inventory purchases on credit by debiting the $10,000 amount to the purchases account and crediting the same amount to accounts payable if we use the periodic inventory system.

Periodic inventory system:

Account	Debit	Credit
Purchases	10,000
Accounts payable		10,000

In this periodic inventory system, at the end of the period when calculating the cost of goods sold, we will add this $10,000 amount as an addition to the cost of goods sold.

On the other hand, if we use the perpetual inventory system instead, we can make the journal entry for the $10,000 inventory purchases by debiting this amount to the inventory account directly as below:

Perpetual inventory system:

Account	Debit	Credit
Inventory	10,000
Accounts payable		10,000

This journal entry will increase the inventory balance on the balance sheet by $10,000 as of January 1. In this case, both total assets and total liabilities on the balance sheet will increase by $10,000 as a result of purchasing $10,000 inventory on credit.

Later, when we make the cash payment for the $10,000 credit purchases of inventory, we can make the journal entry to record the payment as below:

Account	Debit	Credit
Accounts payable	10,000
Cash		10,000

This journal entry will reduce both total assets and total liabilities by $10,000 as a result of paying the cash to settle the credit purchases of the inventory we made previously on January 1.

Journal entry for inventory sales

Similar to the inventory purchases, there will be a difference between the journal entry for inventory sales under the periodic inventory system and the one that is under the perpetual inventory system regarding the treatment of the outflow of inventory goods from our business.

Specifically, if we use the periodic inventory system, we don’t need to update the inventory balance at the time of sale. In other words, the balance of the inventory on the balance sheet will stay the same even after the inventory sales transaction.

This is due to we only update the balance of the inventory when we perform the physical count of the inventory which is usually done at the end of the accounting period. As the name suggested, under the periodic inventory system, the balance of inventory will only need to be updated periodically.

In this case, we can make the journal entry to record the inventory sales by debiting the accounts receivable or cash account and crediting the sales revenue account if we use the periodic inventory system.

Periodic inventory system:

Account	Debit	Credit
Accounts receivable/cash	$$$
Sales revenue		$$$

This journal entry for inventory sales will increase both total assets on the balance sheet and total revenues on the income statement by the same amount.

On the other hand, if we use the perpetual inventory system, we need to update the balance of the inventory after the sale transaction. In other words, we need to record the reduction of inventory as a result of the sales by transferring this amount of reduction to the cost of goods sold account.

Hence, we can make the journal entry for the inventory sales under the perpetual inventory system by recording both sales transactions and the cost of goods sold as below:

Perpetual inventory system:

Account	Debit	Credit
Accounts receivable/cash	$$$
Sales revenue		$$$

Account	Debit	Credit
Cost of goods sold	$$$
Inventory		$$$

In this journal entry, the cost of goods sold will accumulate as the inventory sales are made. And the balance of the inventory will also decrease as the cost is transferred to the cost of goods sold account under the perpetual inventory when the sales occur.

Inventory sales example

For example, on January 1, we make $5,000 credit sales of merchandise inventory to one of our customers. The cost of these inventory goods was $3,000 on the balance sheet. Later, on February 1, we receive the $5,000 cash payment from our customer for this credit sale.

In this case, on January 1, we can make the journal entry to record the $5,000 inventory sales by debiting this amount to the accounts receivable and crediting the same amount of $5,000 to the sales revenue account if we use the periodic inventory system.

Periodic inventory system:

Account	Debit	Credit
Accounts receivable	5,000
Sales revenue		5,000

On the other hand, if we use the perpetual inventory system, we will make another journal entry to record the cost of goods sold as the reduction of the inventory balance as below:

Perpetual inventory system:

Account	Debit	Credit
Accounts receivable	5,000
Sales revenue		5,000

Account	Debit	Credit
Cost of goods sold	3,000
Inventory		3,000

Later, on February 1, when we receive the $5,000 cash payment from our customer for the previous credit purchases, we can make the journal entry for the $5,000 receivable collection as below:

Account	Debit	Credit
Cash	5,000
Accounts receivable		5,000

This journal entry will clear the $5,000 of accounts receivable that the customer owed us for the credit sales of the inventory we made on January 1 previously.