Journal Entries Under The Perpetual Inventory System Bhushan

Journal Entries Under The Perpetual Inventory System Bhushan Building

Journal Entries Under The Perpetual Inventory system. Bhushan Building Supplies entered into the following transactions. June 1 Purchased merchandise on account from Brij Builders Materials, $30,000. 3 Purchased merchandise for cash, $24,000. 5 Sold merchandise on account to Champa Construction for $60,000. The merchandise cost $45,000. Prepare Journal entries under the perpetual inventory system.

Paper For Above instruction

The purpose of this assignment is to prepare journal entries under the perpetual inventory system based on specific transactions involving Bhushan Building Supplies. The transactions include purchases of merchandise both on credit and with cash, as well as a sale transaction with an associated cost of goods sold. For each of these transactions, detailed journal entries are required to accurately reflect the impacts on inventory, accounts payable, cash, sales, and cost of goods sold (COGS).

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Introduction

The perpetual inventory system maintains a continuous record of inventory and cost of goods sold (COGS) with each transaction. Unlike the periodic system, which updates inventory and COGS at the end of a period, the perpetual system updates these accounts instantly after each purchase and sale. This question involves familiar transactions such as purchasing inventory on credit and cash, and selling inventory on account, which necessitate specific journal entries reflecting these activities.

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Transaction 1: Purchase of merchandise on account

On June 1, Bhushan Building Supplies purchased merchandise worth $30,000 from Brij Builders Materials on credit. Under the perpetual inventory system, this transaction increases inventory and accounts payable simultaneously. The journal entry is:

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June 1

Debit Inventory $30,000

Credit Accounts Payable $30,000

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This entry reflects that inventory has increased, creating a liability to pay Brij Builders Materials later.

Transaction 2: Purchase of merchandise for cash

On June 3, Bhushan Building Supplies bought merchandise worth $24,000 for cash. This purchase increases inventory and decreases cash immediately. The journal entry is:

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June 3

Debit Inventory $24,000

Credit Cash $24,000

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This entry demonstrates the cash outflow and inventory increase.

Transaction 3: Sale of merchandise on account

On June 5, Bhushan Building Supplies sold merchandise with a cost basis of $45,000 to Champa Construction for $60,000 on credit. The sale creates revenue and accounts receivable, while the inventory decreases and COGS increases accordingly.

First, record the sale:

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June 5

Debit Accounts Receivable $60,000

Credit Sales $60,000

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Since the merchandise sold cost $45,000, record the cost of goods sold and reduction in inventory:

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June 5

Debit Cost of Goods Sold $45,000

Credit Inventory $45,000

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These entries accurately reflect the revenue earned, the receivable created, and the decrease in inventory along with the COGS recognized due to the sale.

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Summary

The above journal entries follow the principles of the perpetual inventory system by updating inventory and COGS immediately upon transactions. These entries ensure that the company's financial statements accurately reflect its inventory levels, expenses, and revenues in real-time.

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Conclusion

Preparing journal entries under the perpetual inventory system requires careful estimation of inventory and related accounts immediately after each transaction. As demonstrated, transactions involving purchases and sales are recorded directly within inventory and expense accounts, illustrating the real-time nature of this method. This approach aids in accurate inventory tracking, timely financial reporting, and effective management decision-making.

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References

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  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Practice (12th ed.). Pearson.
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  • American Institute of CPAs (AICPA). (2022). Journal Entries in Inventory Accounting. Journal of Accountancy, 233(3), 42-47.
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  • AccountingTools. (2020). Inventory Journal Entries. Retrieved from https://www.accountingtools.com
  • Investopedia. (2023). Perpetual Inventory System. Retrieved from https://www.investopedia.com

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