The potential inventory related transactions for a retailer would include the purchase of inventory, purchase discounts on inventory, and sale of inventory.
Journal Entry for the Purchase of Inventory
When inventory is purchased from a vendor, this is capitalized on the balance sheet in the Inventory account when title to that inventory is taken. When this inventory is purchased but payment will be made at a later date, the corresponding credit is made to the Accounts Payable to create the liability. This will sit out there until the payment is made. The journal entry to capitalize the inventory and record the liability is as follows.
Dr. Inventory $750
Cr. Accounts Payable $750
Journal Entry for Inventory Discounts
Lets assume that the vendor has terms that state a discount will be given on the inventory for early payment, perhaps within the first 30 days following delivery. If your entity makes payment during this window, then ultimately this needs to find its way into the financials. The best way to go about doing this is to eliminate the liability for Accounts Payable from the books at what you originally recorded it for. The amount of cash paid must be removed from the books, and the cost of the inventory will need to be reduced in order for it to be recorded at the cost paid. The following example assumes a $50 discount was granted for early payment.
Dr. Accounts Payable $750
Cr. Cash $700
Cr. Inventory $50
Journal Entry for the Sale of Inventory
Once inventory is sold, then there are really two journal entries that must be booked. The first will be an entry to record the sales. We will assume the inventory was sold for $1,000.
Dr. Cash $1,000
Cr. Sales $1,000
The inventory related side of this transaction will be to remove the inventory and record the cost of goods sold expense. Notice that we are removing the final value that the inventory was on the books for in the example above, net of cash discount, at $700. The Cost of Goods Sold expense on the income statement will also be debited, or increased, for the value of inventory that has been sold.
Dr. Cost of Goods Sold $700
Cr. Inventory $700
In this example, the amount of gross margin is $300 for the sale ($1,000 selling price, minus $700 inventory cost, equals $300 profit).
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