 In this presentation, we will record the purchase and sale of inventory using a perpetual inventory system. We will record this data over here into this general journal, posting it not to a general ledger, but to just this worksheet, this worksheet being a more simplified form when there's just a few transactions in order for us to quickly see where we started, what we entered, where we are ending up at. So we'll go through this process, note what we have so far. Debits and credits will be represented as debits and credits in our journal tree, and credits represented with bracketed or negative numbers, which will help us with our formulas. When we go over to this section, however, debits are represented simply or only with positive numbers, credits represented with the negative or bracketed numbers, allowing us to reduce the number of columns, simplify our formulas, seeing that we are in balance with this zero down here, calculating the debit balances minus the credit balances being zero. So this green zero is our check figure that we are in balance. This will be our net income calculation. We're going to start with net income of just 100,000 of sales, which is basically just an arbitrary number. And the reason I want to just start with something in sales is just to show that that is the calculation here and also to show that the sales is going to be a credit balance account, because oftentimes people mix it up with the cash account up here as a debit balance. So that's going to be this item. We're just going to start with that. It's not going to be part of our problem. That's going to be sales prior to this or unrelated to the transactions that we are selling here. Of course, that's our beginning numbers. Then we're going to enter our data into the adjusting column, and that will give us our ending numbers here. And we'll see the change that will happen to net income as we make these sales. When you do this, you want to be able to compare and contrast this in your mind to a periodic system and we'll point out the transactions where they will differ. And those are going to be the sales transactions where we will be recording not just the accounts receivable and sales, but also the reduction of inventory and cost of goods sold as we go. As opposed to doing that simp just at the end of the process through a physical count. We'll still do a physical count and we'll still calculate cost of goods sold in order to see if there's any shrinkage, any loss of inventory, any theft. But we're going to be recording this perpetually as we go. Hence the name, Perpetual Method. First transaction. We're going to start off on 1-1. It says purchase merchandise on account, 15,000. So we're going to purchase merchandise. First question is cash affected. It's not because we purchased it on account. Therefore, we paid accounts payable is how we paid for it. But it's often harder for people to know whether we debit or credit accounts payable. It might be easier first to think about what we received if cash is not affected. In this case, that being merchandise inventory. Merchandise inventory has a debit balance. We got more of it. We purchased it. Therefore, we will do the same thing to it, another debit. So I'm going to copy this cell in H7, right-click and copy. We're going to put this in D5, right-click and paste 1, 2, 3. We're going to put the amount then here in E5. And by the way, you could type that in there, that'd be okay. But I'm going to practice copying and pasting, making the Excel as easy as possible. Then we're going to type this in here, 15,000. That's the amount that we're purchasing in dollars, not in units. Then we're going to have a credit of something. So we can just fill that out now, even if we didn't know the account. We could put a negative of 15,000. I'm going to use a formula and say negative of this number. So it's just going to say I want to take that number and flip the sign, which will give us a negative 15,000. Now we just need to know what that account will be. And we didn't pay cash for it, so we're not decreasing cash with a credit. We are increasing the liability, the accounts payable. So here's the accounts payable. We're going to copy that, right-click and copy. We're going to put that in D6, right-click and paste 123. Going to the home tab, alignment, increase the indenting just to give it that little indenting. You don't have to do that, but you can. If you have problems with the formatting because it's locked or something like that, double-click on the cell, just space bar three times will work as well. Now we already know that we're going to credit this because we've debited the merchandise inventory. If we think about it, just to double-check that and get a better understanding of accounts payable as we go, we can see it has a credit balance. The bad thing is going up because we owe more, and therefore we're going to do the same thing to it, which is another credit increasing the amount we owe. Now we're going to post this to our worksheet. So here's the merchandise inventory. Here's the merchandise inventory on our worksheet. We will be posting to the middle column, the entries column, in column J. So we are in J7. Now it is important or very useful to use formulas here. So this is where you really want to use formulas. So we're in J7, I'm going to say equals, and we're going to point to this 15,000. That's a debit. This is a debit. Those are the same increasing when we select enter this 10,000 by 15,000 to 25,000. Also puts this out of balance down here. No change to net income. Then we're going to go to the accounts payable. That's the second account we're going to post. Here it is here. We're in the adjusting column for accounts payable. And so J8, J8, we're going to say equals and point to this credit. This is a credit. That's a credit. Those are the same things. It's going to make this balance go up in the credit direction, put us back in balance here. No effect on net income. Enter. So we're increasing by 21.5. Over here, remember that's a credit. It's a negative number for Excel. But for us, it's just a credit. It's not. It's just a credit balance increasing in the credit direction. No effect on net income. So note these accounts aren't affected at all. We purchased merchandise. We have not yet sold it. We will record the cost, the expense related to it, at the point in time of sale in the form of cost of goods sold. Next transaction is going to be on 13. We're going to make a sale and we're going to assume it's on account, meaning we didn't get cash yet. And we're going to make the sale of 2,800. And there's a markup of a 40% markup. So we can think of the first half of this. I would normally think of this as two journal entries. Most textbooks actually do that this way these days. Although if you see it in software, they might combine the two journal entries. The two journal entries, one, you want to think of a sales transaction similar to if you were a service company. And just make the same transaction as if you didn't have inventory and you just provided a services and earned revenue. Then do the other transaction related to the inventory. So if we remove the inventory accounts, the merchandising accounts, and just think of that first transaction, just the sale, what you see on the sticker price, we would say, okay, we didn't get cash. We got an IOU. We got an accounts receivable. Accounts receivable has a debit balance. We need to make it to go up. So we're going to do the same thing to it, another debit. So I'm going to copy H6, right click and copy H6. We're going to put that in D8. So we're going to right click and paste 1, 2, 3 in D8. And the amount is going to be this 2,800. That's the sticker price. That's not the cost. That's what we have. If you go into the store, you see the sticker price. That's the 2,800. We're going to credit something for 2,800. I'm going to do that. We could type in a negative 2,800. I'm going to put a negative and then point to that sale. I want that sale. I want to flip the sign of that number. So there's our negative 2,800. What account should that go to? Again, we're not thinking about the merchandising accounts of merchandise inventory or cost that gets sold, just the normal revenue account. Now, the revenue account has a different name. We might have called it fees earned if it was a sole proprietor or just revenue or income. We're going to call it sales here, but it's simply a revenue account. It has 100,000 inches showing that it has a credit balance here. That's going to be our starting point. It's a credit. We need to make it go up. So we're going to do the same thing to it, another credit. And of course, we already knew that because we debited the accounts receivable first. So we're going to copy the sales in H10, right-clicking and copy. We're going to put that in D9, right-click and paste 1, 2, 3. Then we will indent, go into the home tab, alignment, increase the indenting. Now we're going to go ahead and post this. We'll post this half, then we'll think about the second half. So the receivables is here. Up top here are the receivables. And we want to be in the adjusting column, column J. So within J6, we're going to use formulas. Important to use formulas here. It's very beneficial. We're going to say this equals and point to that 2,800, bringing the 6,000 up by 2,800 to 8,800. Second half, sales. There's the sales here. Here it is on our trial balance. We're going to go into the J10, J10 and say equals and point to that 2,800. Now sales has a credit balance and we're doing the same thing to it, another credit. Making it go up in the credit direction. That'll put us back in balance and it'll increase net income. So there we have it. Now note this is where we would sit. This is the only thing we would do if it were a perpetual or a periodic inventory system and then we would make the adjustment to inventory and cost of goods sold at the end of the time period in accordance with a physical count. But if we have a system that's sophisticated enough and can track inventory as we go, usually an automated system, something like you see in a grocery store when you scan it, the system knows the cost and we'll record it. Then we can record the second component at the same point in time. A better system to do a perpetual system here, although a bit more sophisticated takes a little bit more time to do it. So how would we do that? Well, we'd say the other side of it is going to be the fact that the inventory went down and we have the cost of goods sold related to the expense related to that inventory going down. So inventory has a debit balance. We need to make it to go down. I'm going to do the opposite thing to it, credit. So in H7, I'm going to right click, I'm going to copy. I'm going to skip one line and then skip another line, putting it down here in D12 so that we can put the credit on the bottom. So in D12, I'm going to right click and paste 1, 2, 3. I'm going to indent that, home tab, alignment, increase the indenting or space bar. And then we're going to go to the outer column. Now we need to know what that amount will be. And so how are we going to do that? We're saying that there's a 40% markup and this is the sales price. So if there's a 40% markup, let's do that. Let's do a little worksheet down here. We're saying that the sales price is 2,800. Now if there's a markup, usually, you know, whatever it was, if it was $1,000, and we're going to mark it up by 40.4. And if we add some decimals there, you're just going to add decimals up here, home tab, number, add decimal. Then we're going to mark it up this times this. And then if we add those two up, that's going to equal this plus this. So if there's a 40% markup, we would sell it a $1,000 product for $1,400. Note you can do that. We can do that with a simplified calculation by saying 1,000. And then if I make this sell 100% plus the 40%, it would be 1.4. Again, I'm going to add some decimals. And then I can just multiply that out. I can say this is going to be this times 1.4. So a markup would be 1.4. Now if I wanted to go backwards then, if I knew this number and I didn't know this number, I can say, okay, well I got 1,400 divided by 1.4. And again, I'm going to add a few decimals. And we're going to say this number divided by this number. And that will give us the 1,000. So that's going to be a long explanation to say that we're saying that we had 2,800 is the sales price with a 40% markup. So we're saying that this is 2,800. And if there's a 40% markup, we can divide it by 1.4. And that'll give us our number here, which will be 2,000. So I'll do that in this formula again. I'm going to highlight this. I'm going to remove the decimals because we will use this later. I'm going to delete our little worksheet here. And we'll do the same thing up here. So we're going to say the amount, I'm going to put equals, it's going to be this number, 2,800, divided by not 40%, but 140%, which is 1.4. Because if I move the decimal point over two places, that would be 140%. So it's 100 plus 40%. And that'll be enter. And that'll give us our 2,000. Now I want it to be a negative. So I'm going to double click on it and just put a negative in front of the 2,800. I don't need any brackets or anything because there's no order of operation problem. So I'm just going to say negative. And there it is, negative 2,000. Okay, so then we're going to debit something for 2,000. So in E11, I'm going to say negative of that number. And then I'll take it, put it up there, flip the sign. So there we have that. And then we just need to know what this account will be. If we have the other side of this inventory and that's going to be cost of goods sold, what we consumed. So I'm going to copy cost of goods sold, put that here in D11, right click and paste 123. So remember, this is the expense. All expenses have debit balances and therefore they go up in the debit direction as we are doing here. So this is a little bit more difficult for most people to know that it's a debit. So that's easier to think about inventory going down first for most people. Then if we post this out, we're going to say that cost of goods sold. It's going to be here in the middle column in J13. Equals, we're going to point to this 2000. That's going to make this debit balance go up in the debit direction. 2000 puts us out of balance and brings net income down. Then we'll post the merchandise inventory. So here it is here. Here it is here. We want to be here in J7. So we're going to right click, we're going to double click and go to the end of it, say plus and point to this 2000. So this 25,000 will go down by that 2000 to 23,000. So it brings our inventory down and here we have our change of what happened, meaning inventory sales went up by the 2800 and cost of goods sold went up, bringing the net change down. What really happened, what really happened net income wise is we increased it by 28,000. You can think of it this way too. You can say, well, these two portions here are going to be the income portion and this portion and this portion of our journal entries are going to be what happened to the balance sheet. So the income went up in the credit direction 2800 and down for the $800 difference and the assets went up by 2800 and then down by 2000 for that difference. So we have the same kind of change happening there from these two journal entries, a change in assets of 800 increase and a change in net income and 800 increase. All right, next transaction. We're going to say this happened on 15. It says we purchased merchandise on account. So we're going to purchase more merchandise. We're not going to pay cash, so cash is not affected. We're going to pay it with accounts payable, but it might be easier to first think about this inventory being what we received. It has a debit balance. We're going to make it go up by doing the same thing to it. Another debit. So merchandise inventory. We're going to right click and copy that. We're going to paste it here in D14. Right click and paste. One, two, three. The amount then that they're going to give us is just this 7000. So we'll say 7000. We're going to credit something 7000 in F15. I'm going to do that with a formula saying negative of that number. So we're going to take that number, flip the sign, giving us a negative 7000. Then we just need the account here. What will that account be? And we purchased it on account, so we're not going to credit cash. We didn't pay cash. We're going to increase the liability. Here's the liability. So we're going to say accounts payable, right click, copy. We're going to paste that here in D15. Right click and paste. One, two, three. Increase the indenting, home tab, alignment, increase the indenting. And there's going to be our transaction. Remember to double check this one all the time. We're going to say we knew we credited because we debited the merchandise inventory. If we double check it, we know that the accounts payable has a credit balance. We need to make it to go up. So we're going to do the same thing to it, another credit. Why does it go up? Because we owe more. The bad thing is going up. Okay, so if we post this out, here's the merchandise inventory here. Here it is up top. We're going to post it to J7. So within J7, we're going to double click, go to the end of it, say plus, and then point to that 7000 and enter. That increases the balance to 30,000. Then we'll do the posting of the accounts payable. So within accounts payable, we're going to go to the center column, J8, double click, go to the end of it, plus, and then point to that 7000, increasing the balance, and putting us back in balance. Increasing accounts payable from 21,500 by 7,000 to 28,500. Next transaction is going to be on 1,8 and we're going to say that we paid for merchandise purchased on 1,1. So here's the merchandise we purchased on account. Now we're paying for it. What are we paying with? Cash. Cash is cash affected. Yes, that's what we're paying with. Cash is a debit balance. We're going to make it go down, doing the opposite thing to it. In this case, that being a credit. So we'll copy the cash. I'm going to put that on the bottom. Note I'm constructing the journal entry not by order of top to bottom, but by order of what is easiest. Cash is usually easiest to think about. So we're going to think about the cash, the credit first. So we'll paste that here, home tab, alignment, increase the indenting. Then we're going to put the amount, which we know from up here. This is how much we purchased. That's how much we're going to pay for at this time. It's going to be a credit. So I'm going to put a negative 15,000. Then we're going to debit something in E17. I'm going to say negative of this number. So I'm just taking that number, flipping the sign. This is a negative number or credit. We're going to take it, flip the sign, making it a positive or debit. Then we're going to put the other account here. What's the other account going to be? Why did we pay cash? We purchased merchandise, but we already recorded the merchandise. Now we're paying off the liability. So the liability has a credit balance. We need to do the opposite to make it go down because we no longer owe it after we pay it. The opposite then being this debit. So we're going to copy the accounts payable, right click and copy. We're going to put that here in D17, right click and paste 123. We'll post this out now. Here's the accounts payable. Here it is up top. We're going to post it to the middle column, J8. Double clicking on it. Going to the end of it. We will say plus. Point to that to 15,000 and enter. So we're left with 13,500 that we owe. We're now going to post this cash account. We're going to have to scroll up just a little. We're going to do a little bit of scroll in here. Here's the cash account. We're going to put it in the middle in J5. Scroll down just a bit. So within J5 we're going to say this equals and point to that 15,000. This is a debit. That's a credit. Those are opposites bringing the 120,000 debit balance down by 15 to 105,000. That also puts us back in balance here. No effect on net income from this transaction. Next transaction is going to be on 110. That means in this date we're going to make another sale. So we made another sale this time of 4,200. We're going to assume it's on account. So remember we're going to do the same thing we did up here. It's basically the same transaction. It is the same transaction with a different number. And this time we're going to say that we made the sale on account. Two transactions. That's how we want to think of it at least. One is the sale that we would have made if we were a merchandiser and we didn't. I mean if we were a service company not having merchandise then including the new component of merchandise. That's how I would think about it. Remove the merchandising accounts. Think about a normal sale of a service company then include the next journal entry that includes the merchandising accounts. So if we made a sale and we were a service company we made it on account. We didn't get cash. Therefore we got an IOU. We got an accounts receivable. So I'll copy accounts receivable. Scroll down. We're going to put that in right click and paste 1 2 3. The amount then is going to be the sticker price the amount given to us 4200. Then we're going to credit something for that same amount. That same 4200 by saying negative of that number. Flipping the sign. Then we just need to know what that account will be and it's going to be revenue. Now within a service company it might be called Feas earned merchandising company often calls it sales. We already see it has a credit balance. We're going to make it go up doing the same thing to it another credit because sales revenue income always goes up. Right clicking sales copy. Going to scroll back down. We're going to put that in D21 right click and paste 1 2 3. Going to indent home tab alignment increase indenting. That's the first half. I'm going to post this out before we go to the second component the inventory component of our sales journal entry. Here's accounts receivable here. Here it is up top accounts receivable. We want to be in the entries column the column J the adjustments we're going to double click on it go to the end of it say plus we're going to scroll down just a bit and we're going to find this accounts receivable 4200 and enter and that's going to increase the accounts receivable put us out of balance by 4200 now we're going to post the second piece the sales piece here's sales here we're going to post that to the middle column going to double click on it go to the end of it say plus and then point to this credit now the 4200 credit that's going to make the sales amount go up by that 4200 enter so it's going to go up by the 4200 there put it back in balance here and make net income go up now we need to do the second portion now we're going to add to it the inventory portion when we make a sale we decrease inventory and we have the cost of that inventory the expense of that inventory that the cost of goods sold so it's usually easy to think that inventory is going down for most people because I know what to debit or credit that way so inventory is a debit balance account it needs to go down so I'm going to do the opposite thing to it or credit it so we'll copy the merchandising inventory scroll back down we're going to skip a line have a new journal entry skip another line to put this on the bottom so we are in sale d24 right click and paste 1 2 3 now the amount again we have to do a little bit of a calculation here we're going to say remember that if there's a 40% markup and the sales price is 4200 we're going to say 4200 minus 100% and 40% what 4200 minus 140% you could think about it this way it's equals 4200 um 4200 times or sorry divided by and then put the brackets here 1% 100% plus the .4 the 40% so it's 140% so 4200 divided by 140% gives us 3000 so that's the amount we're going to use I want to make it a negative so I'm going to double click on it go to the front of it put a negative flipping the sign then we're going to put something up here it's going to be the debit so in e23 I'm going to say negative of this number I'm going to take that number flip the sign enter and I'm going to indent this now so we're in d24 home tab alignment increase the indenting now we just need to know what this account will be and we're selling merchandise and it's going to be the cost of us selling that inventory or cost of goods sold so cost of goods sold here is a debit balance account it only goes up in the debit direction generally and therefore we're going to do the same thing to it another debit so we're going to copy that I'm going to put that down here in d23 right click and paste 1,2,3 we'll then post that out so here's the transaction here we're going to post that up top in j13 double click go to the end of it plus and then point to that 3000 increase in the 2000 by the 3000 to 5000 that puts us out of balance and it brings the net income down so net income is the difference between these two now we're going to do the merchandise so we're going to scroll back up merchandise is here we want to be in the center double click go to the end of it plus scrolling back down there's the merchandise 3000 enter that's going to bring that back down back in balance here the main component we want to see here is that revenue is going up but so is cost of goods sold so the difference here the difference which is 1200 4002 minus 3000 is the net increase the assets too are going up because people owe us money that's what we sold we're going to get cash of 4200 but we gave up inventory of 3000 meaning net assets are going up 1200 so then we're going to have the next transaction is going to be on 112 says we receive customer payment for a sale on 113 of 2800 so this sale we made up here we got paid so question is cash affected yes it is we got money cash is going to go up cash has a debit balance we're going to make it go up by doing the same thing to it another debit so we'll copy the cash right click and copy scroll back down we're going to put that up top in d26 right click and paste 123 the amount is going to be 2800 2800 we're going to credit something for 2800 so I'm going to put negative of this number then we just need to know the amount or the account that we're going to credit by the 2800 it's not going to be revenue because we already recorded revenue instead it's going to be a reduction of the receivable showing that people owe us money by this 13000 once they pay us they no longer owe us that money we need then to make it go down this is a debit balance to make it go down we do the opposite of credit so we're going to copy the accounts receivable right click and copy scroll back down we're going to put that on the bottom in d27 right click and paste 123 then we're going to increase the indenting hometown alignment increase indenting and there we have it we're going to post this out now so here's the cash scroll up to the cash up top here's the cash we're going to scroll to j5 j5 something's in it so we're going to double click on it go to the end of it now we're going to have to scroll down a little bit here so you couldn't make the screen smaller by the way to do this but I don't want to do that for to show it here but that's if you if you have good eyes you can make the screen smaller to see everything on one screen so we're going to go to the home plus scroll down there's our cash it's here in e26 and enter so what we did here is we added e26 and you could just if you have the exact same formatting as I do type in plus e26 the next portion is going to be the accounts receivable scrolling back up here's accounts receivable we'll be in the middle column in j6 double clicking on it going to the end of it we will say plus scroll back down picking up this accounts payable accounts receivable accounts receivable and enter and there we have it again if you double click on it we just added this f27 if you have the exact same sales that you're using over here you can type in plus f27 that brings the receivable down so there's going to be our transaction we're focusing here on these two that are happening now at the end of the day we can still do our cost of good sold calculation we're going to do that now why would we do that because we already know you might say hmm we already know the cost of good sold and we already know the merchandise inventory and those should be correct why do we need to do a cost of good sold calculation it seems like a calculation only used when doing a periodic system but of course you know this number is only going to be right if there was no problems meaning no theft no spoilage or anything like that we still need to do a physical count and basically a calculation cost of good sold calculation will help us to figure what ending inventory should be what the cost of good sold should be and if we need to make any kind of adjustment due to spoilage or shrinkage or theft or something like that so we'll do cost of good sold cost of goods sold very important calculation you want to be able to know this be familiar with it work with it it's going to start with the beginning inventory and now it'll follow basically what we did here in many many respects meaning we started with 10,000 now we're not talking about units here in this case we're talking about dollar amounts you could do the same calculation in units we're not going to deal with units now we'll introduce them here we'll talk more about them in a future class when we talk about inventory methods life will fight full average cost so we're going to be here we're going to say $1000 worth and then we're going to say we had purchases so we're going to say purchases which is what we added and you can see it here but it's basically these two amounts are purchases that we did during this time period so I'm going to do it this way I'm going to be here I'm going to say it equals this number is a purchase and that's 7000 those are two inventory purchases 15,000 plus 7000 you can do it with a formula or just add them up and we're going to get 22,000 that gives us goods available for sale goods available for sale and if we sum those up we're going to get 32,000 I'm going to use the sum function to do so we'll say equals sum double click the sum function highlight those two amounts and that'll give us our 32,000 note that that sum function if you're not familiar with that most important function you're going to want to get familiar with the sum function and so that's that and then we're going to have the ending inventory now the ending inventory is something that we would have to count and note that I did give per unit count here so that we can basically calculate out what we have but we're not going to deal with the units too much note that if we say that there's ending inventory at 2700 units we'll calculate out the ending inventory in dollars so we're going to say then the ending inventory and I'm going to say this little calculation we're going to say this equals the 2700 units times 10 dollars so that's the physical count we had it's important to note that note when we do count it obviously we're counting units and we'll have to have some type of conversion again we'll talk more about that how to convert it at a later point it might not always be even at a 10 dollar even method so note that if this is what we had available for sale and that means that at any given time that's what available over the entire time period the month or the year that's what we could have sold during that time period because that's what we had at any given time throughout the entire time period we couldn't have sold more than that because we didn't have it then if we count what we had at the end of the time period we assume that the difference is the cost of goods sold of course we having done a perpetual system have already calculated cost of goods sold perpetually as we go through the process to be 5000 so we expect this to be 5000 if it were not and we'll demonstrate this later where it is not then it'll be due to some spoilage or something like that so at this point we'll show that it's going to be the same if we subtract these two out this is going to be the 32000 minus the 27 equals cell G21 minus G22 that'll give us our 5000 of cost of goods sold so this will match out what we have here we have 5000 cost to get sold that's what our perpetual system had and we had 27000 in the inventory that's what our perpetual system had therefore we don't need to make any adjustments later we'll talk about the calculation where we would need to make an adjustment and then how to make that adjustment