Fowler Merchandising Journal Entries

Hello students. In this video I’m going
to talk briefly about the differences between the perpetual and periodic
inventory systems and journal entries. There is a very good summary in the
textbook – a comparison between the periodic and the perpetual system – you should go
to your textbook and study that summary so that you’ll be more familiar with the
actual journal entries. But I will go over a few of the differences here. Also
I know that you have just finished the chapter on special journals. I just want
to point out that that is the only chapter that we will be using special
journals. We will be going back to the general journal in this
chapter and all chapters that follow and we will be using the general journal
format so keep that in mind. Okay, looking at purchases under the perpetual
inventory system, we’re going to be debiting the merchandise inventory
account for purchases and crediting accounts payable. That is of course
unless we pay cash for the inventory which we don’t normally do. We normally
credit accounts payable. It will go directly into the merchandise inventory
account because we are using the perpetual inventory system and as we
talked in a previous video, we know that any transactions that affect inventory
will go to the inventory account. Under the periodic system we’re going to
actually debit purchases when we have a purchase. We again will credit accounts
payable. So the only difference here between the two systems is the debit.
Here we will be debiting merchandise inventory. Here we will be debiting
purchases. And the reason that we don’t debit inventory in the periodic system
is because we’re not keeping up with the inventory as it is purchased and sold. So
it will go into the purchases account. Okay when we go over to the sales side under
the perpetual system, anytime you make a sale, you’re going to have two
entries – not just one – you will have the first entry to record the sale. That’s
going to be a debit to accounts receivable and a credit to sales. The second
entry is going to record the cost of the sales and reduce the inventory. So you’re
going to debit cost of merchandise sold and credit merchandise inventory. That’s
under a perpetual system where we are keeping up with the changes in inventory
and we’re keeping up with the cost of merchandise sold. Now under the periodic
system, we’re not going to be keeping up with inventory and we will not have the cost
of merchandise sold account. So under the periodic system you will simply have a
debit to accounts receivable and a credit to sales. That’s all you will have
there. This is just an example of some of the journal entries that we will have
in this chapter. If you do have any questions please let me know. Thank you.

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