Accounting for Merchandising Activities – PERPETUAL INVENTORY SYSTEM

A merchandising enterprise may use either the periodic system or the perpetual system in accounting for
its inventory. The perpetual system is an alternative to the periodic system. The manner of recording
purchase and sales transaction under the periodic system is addressed in previous example.

In a perpetual system, all transaction affecting the inventory balance are recorded as they occur, the
system acquired its name from the fact that the inventory records are continuously updated. The
acquisition cost of products purchased is recorded by debiting merchandise inventory or inventory
account.

When merchandise is sold, two entries are prepared: first, to recognize the revenue from sales at selling
price; and second, to recognized the related cost of goods sold at cost. The second entry recognizes the
decrease in the balance of the merchandize inventory account as a result of the sales transaction.

CASE PROBLEM:

June 01 Mr. Daniel started business with an initial capital of P45,000.

3 Purchased merchandise from Mr. Lebron on account, P29,500 terms 2/10, n/30 per invoice #215.
4 Purchased office supplies costing P1,000 on cash basis.
6 Paid P6,000 cash on the purchase of equipment.
7 Sold merchandise to Mr. Nate Lucas as per change invoice #401 at P18,000 terms 2/10, n/30. The
cost of merchandise sold is P15,000.
8 Paid P1,000 freight on the sale of merchandise to Mr. Nate Lucas.
10 Returned defective merchandise to Mr. Lebron worth P1,500.
11 Received cash from Mr. Nate Lucas in full settlement of his account.
12 Paid the account to Mr. Lebron supplier in full.
14 Borrowed money from Mr. Vasquez as evidence by promissory note amounting to P20,000.
16 Bought merchandise from Mr. Zanjoe for cash P20,000.
16 Paid wages to his employees for the first two weeks of June, P7,000.
18 Received refund from Mr. Zanjoe P1,000.
22 Sold merchandise to Mr. Ethan for P24,000 cash. The cost of merchandise sold is P20,000.
23 Purchased merchandise from Mr. Plaridel on account, P10,000 terms 2/10, n/30 per invoice #216.
No discount is allowed on partial payment.
24 Paid freight on June 23 purchases of P100.
25 Paid Mr. Plaridel P5,000.
28 Mr. Daniel withdrew P5,000 cash for personal use.
29 Made refund to Mr. Ethan for defective merchandise, P1,500.
29 Paid the following: Advertising, P1,500; Electricity, P500; and a Rent of P5,000.
30 Paid wages to his employees for the last two weeks of June, P7,000.
30 Sold merchandise to Mr. Ymar as per change invoice #402 for P3,600 terms 2/10, n/30. The cost of
the sold merchandise is P3,000.
Assuming Mr. Daniel now uses PERPETUAL INVENTORY SYSTEM. The following would be the journal
entries, respective to accounts balances, preliminary trial balance, financial statements, and post-closing
trial balance.

GENERAL JOURNAL (GJ1)

DATE ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT

June 01 Cash 101 P45,000.00
Mr. Daniel, Capital 301 P45,000.00
To record initial investment.
03 Merchandise Inventory 103 29,500.00
Accounts Payable 201 29,500.00
To record purchase of goods, terms 2/10, n/30.
04 Supplies 104 1,000.00
Cash 101 1,000.00
To record purchase of supplies.
06 Equipment 105 6,000.00
Cash 101 6,000.00
To record the purchase of equipment.
07 Accounts Receivable 102 18,000.00
Sales 401 18,000.00
Cost of Goods Sold 501 15,000.00
Merchandise Inventory 103 15,000.00
To record sale of merchandise, term 2/10, n/30.
08 Freight Out 506 1,000.00
Cash 101 1,000.00
To record payment of freight on sales.
10 Accounts Payable 201 1,500.00
Purchase Return and Allowances 503 1,500.00
To record the return of merchandise to supplier.
11 Cash 101 17,640.00
Sales Discount 403 360.00
Accounts Receivable 102 18,000.00
To record collection on accounts, June 07.
12 Accounts Payable 201 28,000.00
Merchandise Inventory 103 560.00
Cash 101 27,440.00
To record payment of accounts payable, June 03.
14 Cash 101 20,000.00
Notes Payable 102 20,000.00
To record notes payable.
16 Merchandise Inventory 103 20,000.00
Cash 101 20,000.00
To record purchase of merchandise.
16 Salaries Expense 510 7,000.00
Cash 101 7,000.00
To record payment of salaries.
18 Cash 101 1,000.00
Merchandise Inventory 103 1,000.00
 To record the return of merchandise to supplier, June16.
22 Cash 101 24,000.00
Sales 401 24,000.00
Cost of Goods Sold 501 20,000.00
Merchandise Inventory 103 20,000.00
To record sales of merchandise.
255,000.00 255,000.00
GENERAL JOURNAL (GJ2)
23 Merchandise Inventory 103 P10,000.00
Accounts Payable 201 P10,000.00
To record purchase of goods, terms 2/10, n/30.
24 Merchandise Inventory 103 100.00
Cash 101 100.00
To record payment of freight on purchased goods.
25 Accounts Payable 201 5,000.00
Cash 101 5,000.00
To record payment of accounts payable dated June 23. (No discount is allowed for partial payment)
28 Mr. Daniel, Drawings 302 5,000.00
Cash 101 5,000.00
To record personal withdrawal.
29 Sales Return and Allowances 402 1,500.00
Cash 101 1,500.00
To record the return of merchandise from customers, June 22 sales.
29 Advertising Expense 507 1,500.00
Utilities Expense 509 500.000
Rent Expense 508 5,000.00
Cash 101 7,000.00
To record payment of expenses.
30 Salaries Expense 510 7,000.00
Cash 101 7,000.00
To record payment of salaries.
30 Accounts Receivable 102 3,600.00
Sales 401 3,600.00
Cost of Goods Sold 501 3,000.00
Merchandise Inventory 103 3,000.00
To record sale of merchandise, terms 2/10, n/30.
 Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 01 GJ 1 45,000.0 45,000.0 June 07 GJ 1 18,000.0 18,000.0
0 0 0 0
04 GJ 1 1,000.00 44,000.0 11 GJ 1 18,000.00 --
0 30 GJ 2 3,600.00 3,600.00
06 GJ 1 6,000.00 38,000.0
0
08 GJ 1 1,000.00 37,000.0
0
11 GJ 1 17,640.0 54,640.0
0 0
12 GJ 1 27,440.00 27,200.0
0
14 GJ 1 20,000.0 47,200.0
0 0
16 GJ 1 20,000.00 27,200.0
0
16 GJ 1 7,000.00 20,200.0
0
18 GJ 1 1,000.00 21,200.0
Balance Balance
0
Date Item Date
Post
22 Item Post1
DebitGJ Debit
Credit
24,000.0 Debit
Credit Debit
Credit
45,200.0 Credit
June 04 June
GJ031 GJ 1
1,000.00 29,500.0
0 1,000.00 29,500.0
0
30 GJ242 GJ 2 200.00 0 100.00
800.00 0
45,100.0
07 GJ 1 15,000.00 14,500.0
0
25 GJ 2 5,000.00 0
40,100.0
10 GJ 1 1,500.00 13,000.0
0
28 GJ 2 5,000.00 0
35,100.0
12 GJ 1 560.00 12,440.0
0
29 GJ 2 1,500.00 0
33,600.0
16 GJ 1 20,000.0 32,440.0
0
29 GJ 2 0 7,000.00 0
26,600.0
18 GJ 1 1,000.00 31,440.0
0
30 GJ 2 7,000.00 0
19,600.0
22 GJ 1 20,000.00 11,440.0
0
0
23 GJ 2 10,000.0 21,440.0
0 0
24 GJ 2 100.00 51,540.0
0
30 GJ 2 3,000.00 18,540.0
0

42, 42,
20 20
0.0 0.0
0 0

The ledger accounts shown below are derived from the journal entries of Mr. Daniel.

Account Title: Cash Account Number: 101 Account Title: Accounts Receivable Account Number:
102
 Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 07 GJ 1 18,000.00 18,000.00
June 11 GJ 1 360.00 360.00
22 GJ 1 24,000.00 42,000.0030 GJ 4 360.00 --
30 GJ 2 3,600.00 45,600.00
30 GJ 4 45,600.0 --
0

Account Title: Merchandise Inventory Account Number:

103 Account Title: Supplies

Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 29 GJ 2 1,500.00 1,500.00 June 07 GJ 1 15,000.0 15,000.00
30 GJ 4 1,500.00 -- 0
22 GJ 1 20,000.0 35,000.00
0
30 GJ 2 3,000.00 38,000.00
30 GJ 4 38,000.00 --

Account Number: 104

Account Title: Equipment Account Number: 105 Account Title: Accumulated Depreciation Account Number:
106

Account Title: Accounts Payable Account Number: 201 Account Title: Notes Payable Account Number:
202

Account Title: Mr. Daniel, Capital Account Number: 301 Account Title: Mr. Daniel, Drawings Account Number:
302

Account Title: Sales Account Number: 401 Account Title: Sales Discount Account Number:
403
Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 06 GJ 1 6,000.00 6,000.00

Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 03 GJ 1 29,500.00 June 14
29,500.00 GJ 1 20,000.0 20,000.00
10 GJ 1 1,500.00 28,000.00 0
12 GJ 1 28,000.00 --
23 GJ 2 10,000.00 10,000.00
25 GJ 2 5,000.00 5,000.00

Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 01 GJ 1 45,000.00 45,000.00
June 28 GJ 2 5,000.00 5,000.00
30 GJ 4 16,4600.00 28,540.0030 GJ 4 5,000.00 --
30 GJ 4 5,000.00 23,540.00
Account Title: Sales Return and Allowances Account Number: 402 Account Title: Cost of Goods Sold Account Number:
501

Account Title: Freight Out Account Number: 506 Account Title: Advertising Expense Account Number:
507

Account Title: Rent Expense Account Number: 508 Account Title: Utilities Expense Account Number:
509

Account Title: Salaries Expense Account Number: 510 Account Title: Supplies Expense Account Number:
511

Account Title: Income and Expense Summary Account Number: 601

Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 08 GJ 1 1,000.00 1,000.00 June 29 GJ 2 1,500.00 1,500.00
30 GJ 4 1,000.00 -- 30 GJ 4 1,500.00 --

Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 29 GJ 2 5,000.00 5,000.00 June 29 GJ 2 500.00 500.00
30 GJ 4 5,000.00 -- 30 GJ 4 500.00 --

Balance Balance
Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit Debit Credit
June 16 GJ 2 7,000.00 7,000.00 June 30 GJ 3 200.00 200.00
30 GJ 2 7,000.00 14,000.00 30 GJ 4 200.00 --
30 GJ 4 14,000.00 --

Balance
Date Item Post Debit Credit Debit Credit
June 30 GJ 19,000.00 19,000.00
3
GJ 43,740.00 62,740.00
4
DANIEL GAMBOA
GJ 56,540.00 6,200.00
Preliminary Trial 4 Balance
As of June 30, 20XX GJ 22,200.00 16,000.00
4
GJ 16,000.00 --
4
 Code Account Title Debit Credit
101 Cash P19,600.00
102 Accounts Receivable 3,600.00
103 Merchandise Inventory 18,540.00
104 Supplies 1,000.00
105 Equipment 6,000.00
201 Accounts Payable P5,000.00
202 Notes Payable 20,000.00
301 Mr. Daniel, Capital 45,000.00
301 Mr. Daniel, Drawings 5,000.00
401 Sales 45,600.00
402 Sales Return and Allowances 1,500.00
403 Sales Discounts 360.00
501 Cost of Goods Sold 38,000.00
506 Freight Out 1,000.00
507 Advertising Expense 1,500.00
508 Rent Expense 5,000.00
509 Utilities Expense 500.00
510 Salaries Expense 14,000.00

TOTAL P115,600.00 P115,600.00

Adjusting Entries:

1) Office supplies having original cost of P800.00 were unused till the end of the period.

GENERAL JOURNAL (GJ 3)

DATE ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT
June 30 Supplies Expense 511 P200.00
Supplies 104 P200.00
To record adjusting entry on supplies.

200.00 200.00
FINANCIAL STATEMENTS

DANIEL GAMBOA
Statement of Performance
For the period ended June 30, 20XX

Sales P45,600.00
Less: Sales Return and Allowances P1,500.00
Sales Discount 360.00 (1,860.00)
Net Sales 43,740.00
Less: Cost of Goods Sold 38,000.00
Gross Profit 5,740.00
Less: Operating Expenses
Freight Out 1,000.00
Advertising Expense 1,500.00
Rent Expense 5,000.00
Utilities Expense 500.00
Salaries Expense 14,000.00
Supplies Expense 200.00 (22,200.00)
Net Income/(Loss) (P16,640.00)

DANIEL GAMBOA
Statement of Changes in Equity
For the period ended June 30,20XX

Mr. Daniel, Capital Beginning --

Add: Initial Investment 45,000.00
Less: Daniel Drawings 5,000.00
Total 40,000.00
Net Profit/(Loss) (16,460.00)
Mr. Daniel, Capital End P23,540.00
 DANIEL GAMBOA
Statement of Financial Position
As of June 30,20XX

ASSETS
Current Assets
Cash P19,600.00
Accounts Receivable 3,600.00
Merchandise Inventory 18,540.00
Supplies 800.00
Total Current Assets 42,540.00
Non-Current Assets
Equipment 6,000.00

TOTAL ASSETS P48,540.00

LIABILITIES AND OWNER’S EQUITY

Current Liabilities
Accounts Payable P5,000.00
Non-Current Liabilities
Notes Payable 20,000.00
Total Liabilities 25,000.00

Owner’s Equity
Mr. Daniel, Capital 23,540.00

TOTAL LIABILITIES AND OWNER’S EQUITY P48,540.00

 DANIEL GAMBOA
Statement of Cash Flows
For the period ended June 30,20XX

Cash Flow from Operating Activities

Collection of cash sales P24,000.00
Collection of credit sales 17,640.00
Refund from purchases 1,000.00
Payment of goods bought (52,440.00)
Payment of supplies (1,000.00)
Refund to customers (1,500.00)
Payment of operating expenses (22,000.00)
Freight on purchases (100.00)
Net Cash Flow from Operating Activities (34,400.00)

Cash Flow from Investing Activities

Purchase of equipment (6,000.00)

Cash Flow from Financing Activities

Investment 45,000.00
Withdrawal (5,000.00)
Borrowings 20,000.00
Net Cash Flow from Financing Activities 60,000.00

Increase (Decrease) in Cash 19,600.00

Add: Cash, beginning --
Cash, End P19,600.00
Closing Entries:

GENERAL JOURNAL (GJ4)

DATE ACCOUNT TITLE/ EXPLANATION PR DEBIT CREDIT
June 30 Sales 401 P45,600.00
Income and Expense Summary 601 P43,740.00
Sales Return and Allowances 402 1,500.00
Sales Discounts 403 360.00
To close income accounts.

Income and Expense Summary 601 60,200.00

Cost of Goods Sold 502 38,000.00
Freight Out 506 1,000.00
Advertising Expense 507 1,500.00
Rent Expense 508 5,000.00
Utilities Expense 509 500.00
Salaries Expense 510 14,000.00
Supplies Expense 511 200.00
To close expenses account.

Mr. Daniel, Capital 301 16,460.00

Income and Expense Summary 601 16,460.00
To close the loss for the period to capital
account.

Mr. Daniel, Capital 301 5,000.00

Mr. Daniel, Drawings 302 5,000.00
To close the drawing to capital account.
 127,260.00 127,260.00

DANIEL GAMBOA
Post-Closing Trial Balance
As of June 30,20XX

Code Account Titles Debit Credit

101 Cash P19,600.00
102 Accounts Receivable 3,600.00
103 Merchandise Inventory 18,540.00
104 Supplies 800.00
105 Equipment 6,000.00
201 Accounts Payable P5,000.00
202 Notes Payable 20,000.00
301 Mr. Daniel, Capital 23,540.00

TOTAL P48,540.00 P48,540.00