6 3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System Principles of Accounting, Volume 1: Financial Accounting

If there was a debit of $5,000 and a credit of $3,000 in the Cash account, we would find the difference between the two, which is $2,000 (5,000 – 3,000). The debit is the larger of the two sides ($5,000 on the debit side as opposed to $3,000 on the credit side), so the Cash account has a debit balance of $2,000. Freight-out is the cost that incurs when the company pays the transportation fee for the delivery of goods to the customers.

Cash had a debit of $20,000 in the journal entry, so $20,000 is transferred to the general ledger in the debit column. The balance in this account is currently $20,000, because no other transactions have affected this account yet. To learn how to record freight charges in accounting, first determine the classification for the freight charges. For FOB shipping point, the sale occurred at the shipping point – meaning your company’s dock.

Cash and Credit Purchase Transaction Journal Entries

CBS does not receive a discount in this case but does pay in full and on time. Merchandise Inventory-Tablet Computers increases (debit) in the amount of $4,020 (67 × $60). Accounts Payable also increases (credit) but the credit terms are a little different than the previous example. These credit terms include a discount opportunity (5/10), meaning, CBS has 10 days from the invoice date to pay on their account to receive a 5% discount on their purchase. If FOB shipping point is listed on the purchase contract, this means the buyer pays the shipping charges (freight-in). This also means goods in transit belong to, and are the responsibility of, the buyer.

Free On Board or FOB destination is a freight term used in shipping. This FOB destination term determines the seller to still has responsibility for goods being shipped until they reach the customer’s destination. Once all journal entries have been posted to T-accounts, we can check to make sure the accounting equation remains balanced.

Grocery stores of all sizes must purchase product and track inventory. While the number of entries might differ, the recording process does not. For example, Colfax might purchase food items in one large quantity at the beginning of each month, payable by the end of the month. Therefore, it might only have a few accounts payable and inventory journal entries each month.

Accounting Ratios

In other words, the point of transfer is when the goods arrive at the customer’s destination. Additionally, the seller also has the responsibility to pay for the delivery cost. You notice there are already figures in Accounts Payable, and the new record is placed directly underneath the January 5 record. The record is placed on the debit side of the Accounts Receivable T-account underneath the January 10 record.

The record is placed on the credit side of the Accounts Receivable T-account across from the January 10 record. In the last column of the Cash ledger what is amortization account is the running balance. This shows where the account stands after each transaction, as well as the final balance in the account.

How to Record Accrued Salaries? (Definition, Journal Entries, and Example)

The same process occurs for the rest of the entries in the ledger and their balances. In this journal entry, both total assets on the balance sheet decrease by $100 while expenses on the income statement increase by the same amount. For the FOB shipping point, the sale occurs at the shipping point, and the buyer is responsible for the freight costs to the destination. On the buyer’s side, the transaction is classified as a freight-in and includes all costs from the shipping point to the destination. In this case, the seller will not book any delivery expense in its books.

At this point, the buyer is then responsible for payment of the goods. Freight-in refers to the shipping costs for which the buyer is responsible when receiving shipment from a seller, such as delivery and insurance expenses. When the buyer is responsible for shipping costs, they recognize this as part of the purchase cost. This means that the shipping costs stay with the inventory until it is sold. The cost principle requires this expense to stay with the merchandise as it is part of getting the item ready for sale from the buyer’s perspective.

3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System

It is important to understand the nature of the term accounting FOB, as it will affect how the freight charges are posted to the accounting records. This is because, under the perpetual inventory system, we need to update the inventory balance perpetually (i.e. whenever there is an inventory movement). Hence, we need to record the inventory transaction to the inventory account directly without the need for temporary accounts, such as purchases account or freight-in account here. In accounting, the term “FOB shipping point” means the point of transfer of goods is when the goods leave the seller’s location. In order words, the buyer will bear all the risks and cost of transportation of goods. Another shipping is FOB shipping point in which the buyer is the one who is responsible for the goods being transported.

• Freight-out is the cost that incurs when the company pays the transportation fee for the delivery of goods to the customers.
• On June 1, CBS purchased 300 landline telephones with cash at a cost of $60 each.
• Common Stock had a credit of $20,000 in the journal entry, and that information is transferred to the general ledger account in the credit column.
• The buyer now has an obligation to pay for the goods and is responsible for all future expenses.
• Accounts Payable decreases (debit) and Cash decreases (credit) for $4,020.

The purchase was on credit and the return occurred before payment, thus decreasing Accounts Payable. Merchandise Inventory decreases due to the return of the merchandise back to the manufacturer. On May 1, CBS purchases 67 tablet computers at a cost of $60 each on credit. The payment terms are 5/10, n/30, and the invoice is dated May 1. Accounts Payable decreases (debit), and Cash decreases (credit) for the full amount owed. The goods transfer from the seller to the buyer after the goods have been placed on the delivery truck or ship.

These reports have much more information than the financial statements we have shown you; however, if you read through them you may notice some familiar items. We now return to our company example of Printing Plus, Lynn Sanders’ printing service company. We will analyze and record each of the transactions for her business and discuss how this impacts the financial statements. Some of the listed transactions have been ones we have seen throughout this chapter. More detail for each of these transactions is provided, along with a few new transactions. Note that this example has only one debit account and one credit account, which is considered a simple entry.

FOB destination on buyer’s side

Likewise, the company will need to make the journal entry for freight-out as an expense when it occurs. It is important to make sure that the journal entries for freight charges are accurate and up to date. This will ensure that the financial statements accurately reflect the company’s financial position. Properly recording freight charges in the journal entry is an essential part of the accounting process.

The record is placed on the credit side of the Service Revenue T-account underneath the January 17 record. This is posted to the Cash T-account on the debit side beneath the January 17 transaction. Accounts Receivable has a credit of $5,500 (from the Jan. 10 transaction).

Reviewing journal entries individually can be tedious and time consuming. The general ledger is helpful in that a company can easily extract account and balance information. When we introduced debits and credits, you learned about the usefulness of T-accounts as a graphic representation of any account in the general ledger. But before transactions are posted to the T-accounts, they are first recorded using special forms known as journals.

Perpetual inventory

Fuel costs are one of the most significant factors in determining freight costs, as shipping companies often incorporate a fuel cost component into their pricing models. Accounts Payable decreases (debit) for the amount owed, less the return of $1,500 and the allowance of $120 ($8,000 – $1,500 – $120). Since CBS paid on July 15, they made the 15-day window, thus receiving a discount of 5%. Merchandise Inventory-Printers decreases (credit) for the amount of the discount ($6,380 × 5%).