Inventory is an important asset for businesses, especially for the trading business as they purchase the finished products from the market and resell them by adding their profit margin. That’s why it is essential to record the proper journal entries to document inventory transactions. In today’s modern world, computerized inventory tracking systems are used to generate these transactions. However, you may need to enter some manual journal entries to update the inventory record. In this article, we will discuss journal entries under the periodic system of inventory valuation.
Inventory Purchase Journal Entry
To record the purchase of inventory, the entry will be routed through the accounts payable (creditors) system. The purchase account will be debited to show an increase in inventory level, and accounts payable will be credited that depict an increase in liability.
| Particulars | l/f | Debit | Credit |
| Purchases | Xxx | ||
| Accounts Payables | xxx |
Inventory returned to the supplier
When an inventory is low in quality, damaged, or a wrong item is delivered by the supplier, it is returned to the supplier. The Purchase return account is created to reverse the transaction originally recorded to journalize the inventory purchase. As the liability of a business decreases by returning inventory, so accounts payable are debited.
| Particulars | l/f | Debit | Credit |
| Accounts Payables | xxx | ||
| Purchase Return | Xxx |
Sale of inventory
The sale of inventory items results in an increase in both sales and accounts receivables. The increase in sales is shown by crediting the sale account. Similarly, as accounts receivables are our business’s assets and an increase in assets can be shown by debiting accounts receivables.
| Particulars | l/f | Debit | Credit |
| Accounts Receivables | xxx | ||
| Sale | xxx |
Sale Return
A customer can return the goods he purchased from a company if he is delivered a wrong item or a low-quality item. So, at this point businesses have to reverse their sales to reach appropriate revenue figures. The entry to record sale return is:
| Particulars | l/f | Debit | Credit |
| Sale Return | xxx | ||
| Accounts Receivables | xxx |
Abnormal loss Journal Entry
If the inventory becomes damaged or is lost, this is referred to as abnormal loss. The journal entries are passed to record this abnormal loss into proper account heads. Here is the journal entry to record abnormal loss in the periodic inventory method:
| Particulars | l/f | Debit | Credit |
| Abnormal loss | xxx | ||
| Purchases | xxx |
Abnormal loss is charged in the income statement. It leads to an increase in business expense and a reduction in business profitability.
Example
XYZ company is engaged in merchandised business i.e., it purchases goods from the market and resells them to customers. XYZ Company has purchased inventory costing $10,000 on credit from its suppliers. Later on, it was revealed that the inventory costing $500 was not of good quality. Therefore, it was decided to return this low-quality inventory to the supplier. Goods worth $5,000 were sold to customers at a price of $8,500. Inventory costing $220 was damaged due to mishandling by one of the staff members. XYZ Company uses the periodic inventory method to record these transactions.
The journal entries for recording movements of entry are:
- Purchase of inventory on credit from a supplier
| Particulars | l/f | Debit | Credit |
| Purchases | 10,000 | ||
| Accounts Payables | 10,000 |
- Return of low-quality inventory to the supplier
| Particulars | l/f | Debit | Credit |
| Accounts Payables | 500 | ||
| Purchase Return | 500 |
- Goods costing $5,000 were sold to the customer at a price of $8,500
| Particulars | l/f | Debit | Credit |
| Accounts Receivables | 8,500 | ||
| Sale | 8,500 |
- Recording of abnormal loss
| Particulars | l/f | Debit | Credit |
| Abnormal loss | 220 | ||
| Purchases | 220 |
