Journal Entry for Merchandise Purchased
Overview
In merchandising business, purchasing merchandise is one of the main activities that the merchandising company operates in its business. In this case, the company may need to make the journal entry for merchandise purchased, either on credit or cash, many times during the accounting period.
Merchandise is generally known as the goods that the merchandising company purchases from the suppliers in order to sell them to customers for a margin of profit. The merchandising company usually has a close relationship with its suppliers as it doesn’t change the suppliers often.
Likewise, the company may purchase the merchandise on credit from the supplier more often than the purchases on cash. Of course, before a good relationship is built the company usually needs to purchase the merchandise in cash first. In this case, the company may need to make journal entry for merchandise purchased on credit as well as on merchandise purchased on cash as it may have several or many suppliers in its merchandising business.
Additionally, merchandises are the types of stock or inventory items where the company usually purchases them to store in the warehouse first before it sells them to the customers later. In this case, the company may use the perpetual inventory system or the periodic inventory stem to manage and record its merchandise goods in the warehouse.
As the names suggested, these two inventory systems are different from each other, in accounting for inventory, as one will update the inventory perpetually while another will only update the inventory periodically. Likewise, the journal entry for merchandise purchased under the perpetual inventory system is different from the journal entry for merchandise purchased under the periodic inventory system.
Journal entry for merchandise purchased
As mentioned, the company that uses the perpetual inventory system will make the journal entry for merchandise purchased differently from the company that uses the periodic inventory system. Specifically, under the perpetual inventory system, the company will need to record the merchandise purchased in the inventory account or the merchandise inventory account.
On the other hand, the company that uses a periodic inventory system will not record the merchandise purchased directly into the inventory account but record it into a temporary account, e.g. the purchases account. And the merchandise inventory account will usually only be updated when the company performs the physical count of the remaining merchandise inventory that it has on hand (usually at the end of the period).
Merchandise purchased under perpetual inventory system
Merchandise purchased on credit
Under the perpetual inventory system, the company can make the journal entry for merchandise purchased on credit by debiting the merchandise inventory account and crediting the accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Merchandise inventory | 000 | |
| Accounts payable | 000 |
In this journal entry, while the total assets on the balance sheet increase due to the increase of the merchandise inventory, the total liabilities also increase by the same amount as the company has obligation to settle the accounts payable by paying the supplier in the future.
Merchandise purchased in cash
If the company purchases the merchandise in cash, it can make the journal entry for merchandise purchased by recording the merchandise inventory on the debit side and the cash account on the credit side as a result of cash outflow from the company on the date of the purchase under the perpetual inventory system.
| Account | Debit | Credit |
|---|---|---|
| Merchandise inventory | 000 | |
| Cash | 000 |
This journal entry is a bit different from the merchandise purchased on credit. The impact on the merchandise purchased on credit is the increase of both total assets and total liabilities, while the merchandise purchased on cash has zero impact on the total assets and zero impact on total liabilities of the balance sheet. This is due to the journal entry for merchandise purchased on cash will lead to an increase of the asset (merchandise inventory) on one side while decreasing another asset (cash) on another side resulting in zero impact as the increase and decrease of the two assets net off each other.
Merchandise purchased under periodic inventory system
Merchandise purchased on credit
Under the periodic inventory system, the company can make the journal entry for merchandise purchased on credit by debiting the purchases account and crediting the accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Purchases | 000 | |
| Accounts payable | 000 |
Purchases account is a temporary account for the merchandise purchased in which its normal balance is on the debit side. The purchases account will be cleared at the end of the period when the company needs to update the ending balance of the merchandise inventory in order to calculate the cost of goods sold during the period.
Merchandise purchased in cash
If the company purchases the merchandise in cash, it can make the journal entry for the merchandise purchased by crediting the cash account instead of the accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Purchases | 000 | |
| Cash | 000 |
Merchandise purchased example
For example, on October 1, the company ABC, which is a merchandising company, purchases $10,000 of merchandise on credit from one of its suppliers. Later, on October 25, it pays $10,000 in cash to the supplier in order to settle this credit purchase.
If the company ABC uses the perpetual inventory system, what is the journal entry for the $10,000 merchandise purchased above?
On the other hand, if the company ABC uses the periodic inventory system instead, what will the journal entry for merchandise purchased change to?
Solution:
Perpetual inventory system
If the company ABC uses the perpetual inventory system, we can make the journal entry on October 1, for the $10,000 merchandise purchased by debiting the $10,000 into the merchandise inventory account and crediting the same amount into the accounts payable for the credit purchased it has made.
October 1
| Account | Debit | Credit |
|---|---|---|
| Merchandise inventory | 10,000 | |
| Accounts payable | 10,000 |
In this journal entry, both total assets and total liabilities on the balance sheet increase by $10,000 as of October 1.
October 25
On October 25, when the company ABC pay the $10,000 to settle the credit purchase, we can make the journal entry by debiting the $10,000 into the accounts payable to remove it from the balance sheet as below:
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | 10,000 | |
| Cash | 10,000 |
As this journal entry is for the settlement of the $10,000 of credit purchase that the company ABC has made on October 1, both total assets and total liabilities on the balance sheet will decrease by $10,000.
Periodic inventory system
If the company ABC uses the periodic inventory system, it can make the journal entry for the $10,000 purchase of merchandise by recording it into the purchases account on October 1 as below:
October 1
| Account | Debit | Credit |
|---|---|---|
| Purchases | 10,000 | |
| Accounts payable | 10,000 |
In this journal entry, the $10,000 is recorded in the purchases account because, if it uses the periodic inventory system, the company ABC will only update the merchandise inventory account when it performs the physical count of the actual inventory.
The journal entry on October 25 for the settlement of the $10,000 credit purchase will be the same as the above since it is not the transaction of inventory in or inventory out. Likewise, this journal entry, either under the periodic inventory system or perpetual inventory system, is the same as debiting the accounts payable of $10,000 and crediting the cash account with the same amount.
October 25
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | 10,000 | |
| Cash | 10,000 |