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Purchase of Merchandise Inventory: Perpetual Method

Merchandising businesses purchase merchandise that is then sold to customers. A merchandiser may be a retailer, distributor, or wholesaler. A merchandiser is a buyer and a seller. It is imperative that the accountant knows which role the merchandiser is assuming in each transaction, because the recording for each role is different, as we will see later in the lesson.

Let's explore the following terms and their relationships to merchandising transactions:

merchandise inventory: Merchandise inventory refers to the goods on hand held for sale (a current asset).

purchases of inventory: Purchases are recorded as a debit to merchandise inventory. The merchandise inventory account must always reflect the cost of the merchandise.

credit terms: Credit terms refer to the number of days allowed before payment is due; a discount may also apply if the invoice is paid within a limited time. The following are examples of possible credit terms:
- cash: Payment is due on delivery.
- n/30: Payment is due in 30 days.
- n/eom: Payment is due at end of month.
- 2/10, n/30: There will be a 2% discount if invoice is paid within 10 days. Otherwise, the net is due in 30 days.

purchase discounts: The buyer saves by paying within the discount period; the amount saved is a reduction (credit) to the merchandise inventory account.

purchase returns and allowances: When the buyer returns merchandise that is unacceptable, the cost of the goods returned reduces (credits) the merchandise inventory account.

Example

A merchandiser uses the perpetual inventory method when recording inventory transactions. It had the following transactions in the month of March related to purchasing and paying for merchandise:

On March 1, the corporation purchased merchandise, paying cash ($5,000).
On March 3, the corporation purchased merchandise inventory on account for $10,000 from ABC Company. The terms of the purchase were 2/10, n/30. This means that we will receive a 2% discount if we pay the bill within 10 days.
On March 10, the corporation purchased merchandise inventory on account for $20,000 from XYZ Company. The terms of the purchase were 2/10, n/30. This means that we will receive a 2% discount if we pay the bill within 10 days.
On March 11, the corporation paid for the merchandise inventory purchased on March 3 on account, less the 2% discount.
On March 15, the corporation returned $8,000 of merchandise inventory purchased on account on March 10.
On March 31, the corporation paid for the merchandise inventory purchased on account on March 10, less the amount returned on March 15. The payment was not made within the discount period of 10 days.

Entry 1

On March 1, the corporation purchased merchandise, paying cash ($5,000).

This transaction is recorded as follows:

General Journal
Date	Accounts and explanation	Debit	Credit
March 1	Merchandise inventory	$5,000	-
-	Cash	-	$5,000
-	Paid cash for merchandise inventory.	-	-

Merchandise inventory is a current asset and appears on the company’s balance sheet.

Entry 2

On March 3, the corporation purchased merchandise inventory on account for $10,000. The terms of the purchase were 2/10, n/30. This means that we will receive a 2% discount if we pay the bill within 10 days.

The transaction is recorded as follows:

General Journal
Date	Accounts and explanation	Debit	Credit
March 3	Merchandise inventory	$10,000	-
-	Accounts payable, ABC Company	-	$10,000
-	Purchased merchandise inventory on account. Terms 2/10, n/30.	-	-

Entry 3

On March 10, the corporation purchased merchandise inventory on account for $20,000. The terms of the purchase were 2/10, n/30. This means that we will receive a 2% discount if we pay the bill within 10 days.

The transaction is recorded as follows:

General Journal
Date	Accounts and explanation	Debit	Credit
March 10	Merchandise inventory	$20,000	-
-	Accounts payable, XYZ Company	-	$20,000
-	Purchased merchandise inventory on account. Terms 2/10, n/30.	-	-

Entry 4

On March 11, the corporation paid for the merchandise inventory purchased on March 3 on account, less the 2% discount.

The transaction is recorded as follows:

General Journal
Date	Accounts and explanation	Debit	Credit
March 11	Accounts payable, ABC Company	$10,000	-
-	Cash	-	$9,800
-	Merchandise inventory	-	$200
-	Paid for merchandise inventory on account within discount period.	-	-

We owe $10,000 from the March 3rd purchase. The entire $10,000 must be removed from our accounting records even though we did not pay the full amount, because we no longer owe this money to ABC. We paid within 10 days and received a 2% discount. The discount is calculated as follows: $$ 10, 000 x 2 % = $ 200$ . We will pay our supplier $9,800 ( $$1 0, 000 - $ 200 discount$ ). We record the discount with a credit to merchandise inventory when using the perpetual inventory system.

Entry 5

On March 15, the corporation returned $8,000 of merchandise inventory purchased on account on March 10.

The transaction is recorded as follows:

General Journal
Date	Accounts and explanation	Debit	Credit
March 15	Accounts payable, XYZ Company	$8,000	-
-	Merchandise inventory	-	$8,000
-	Returned inventory to seller.	-	-

Entry 6

On March 31, the corporation paid for the merchandise inventory purchased on account on March 10, less the amount returned on March 15. The payment was not made within the discount period of 10 days.

The transaction is recorded as follows:

General Journal
Date	Accounts and explanation	Debit	Credit
March 31	Accounts payable, XYZ Company	$12,000	-
-	Cash	-	$12,000
-	Paid for merchandise inventory purchase on account after discount period.	-	-

We owe our supplier $12,000. The original purchase on March 10 was for $20,000 worth of merchandise, but we returned $8,000 worth of merchandise on March 15.

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