Inventory Sale Journal Entry
Overview
Perpetual inventory system and period inventory system are the two methods of accounting for inventory that is different from one to another. Likewise, the inventory sale journal entry will be different if one company follows the perpetual system while another company follows the periodic system.
This is due to under the perpetual system, the company keeps updating the inventory record (i.e. inventory in or out) throughout the period while, under the periodic system, the company only updates the inventory record at the end of the accounting period.
Hence, the inventory account will only show up in the inventory sale journal entry if the company uses the perpetual system. On the other hand, there will be only accounts receivable or cash account with sales revenue if the company uses the periodic system. In any case, the journal entry of inventory sale will affect both the balance sheet and the income statement.
Inventory sale journal entry
Perpetual inventory system
Under the perpetual system, the company can account for inventory sale by making two journal entries. The first entry is to recognize the sale revenue that the company makes by debiting accounts receivable or cash and crediting sales revenue account. Another journal entry is to recognize the cost of goods sold as a result of sale by debiting the cost of goods sold account and crediting the inventory account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | 000 | |
| Sales revenue | 000 |
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 000 | |
| Inventory | 000 |
In this journal entry, the company records the cost of goods sold as well as updates the inventory balances on the date of inventory sale. Likewise, the inventory balances will be up to date and the company can review it anytime without making physical inventory count. Of cause, the company still performs the physical count of inventory sometimes for the control purpose.
Periodic inventory system
Under the periodic system, the company makes only one journal entry for inventory sale by debiting accounts receivable or cash account and crediting the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable/cash | 000 | |
| Sales revenue | 000 |
Unlike the perpetual inventory system, there is no cost of goods sold account or the inventory account in the above journal entry. This is due to, under the periodic system, the company does not record the cost of goods sold nor make any update to the inventory balances on the date of sale.
Likewise, the inventory balances at the end of the accounting period will be based on the actual physical count of inventory. At the same time, the cost of goods sold during the period will be calculated by using the beginning inventory plus purchases minus the ending inventory.
Example
For example, on October 15, 2020, the company ABC Ltd. makes a $2,000 sale to one of its customers on credit. The goods cost $1,300 in the inventory and the company uses the perpetual system to account for inventory.
What is the journal entry for the sale transaction?
If the company ABC Ltd. uses the periodic inventory system instead, what is the journal entry for the sale above?
Solution:
Perpetual inventory system
Under the perpetual system, the company ABC Ltd. can make the journal entry for inventory sale on October 15, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 2,000 | |
| Sales revenue | 2,000 |
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 1,300 | |
| Inventory | 1,300 |
In this journal entry, the company deducts $1,300 from the inventory balances and recognizes it as the cost of goods sold immediately after making sale on October 15, 2020. Likewise, the company can check the inventory account immediately and will see that the inventory balances are reduced by $1,300 after this transaction.
Periodic inventory system
If ABC Ltd. uses the periodic inventory system instead, it will only make a journal entry for sales revenue and accounts receivable on October 15, 2020, as below:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 2,000 | |
| Sales revenue | 2,000 |
Under the periodic system, the company does not record the cost of goods sold on the date of sale, hence there is no journal entry for the cost of goods sold and inventory like the perpetual system above.
Likewise, there is no update to the figures of the cost of goods sold and inventory on October 15, 2020. So, if the company checks the inventory account or cost of goods sold after making the sale of $2,000, it will still show the old figures of the previous period.