Companies debit the Merchandise Inventory account for each purchase and credit it for each sale so that the current balance is shown in the account at all times. Under perpetual inventory procedure, the Merchandise Inventory account provides close control by showing the cost of the goods that are supposed to be on hand at any particular time. Computerization makes it economical for many retail stores to use perpetual inventory procedure even for goods of low unit value, such as groceries.
#Cogs debit or credit software
Today, computerized cash registers, scanners, and accounting software programs automatically keep track of inflows and outflows of each inventory item.
Historically, companies that sold merchandise with a high individual unit value, such as automobiles, furniture, and appliances, used perpetual inventory procedure. The following video explains the difference between periodic and perpetual inventory methods:Ĭompanies use perpetual inventory procedure in a variety of business settings. Under perpetual inventory procedure, the Merchandise Inventory account is continuously updated to reflect items on hand, and under the periodic method we wait until the END to count everything. The difference between perpetual and periodic inventory procedures is the frequency with which the Merchandise Inventory account is updated to reflect what is physically on hand. When discussing inventory, we need to clarify whether we are referring to the physical goods on hand or the Merchandise Inventory account, which is the financial representation of the physical goods on hand. Accountants use two basic methods for determining the amount of merchandise inventory-perpetual inventory procedure and periodic inventory procedure. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue.Ī ccountants must have accurate merchandise inventory figures to calculate cost of goods sold.
Cost of Goods Sold is an EXPENSE item with a normal debit balance (debit to increase and credit to decrease). Therefore, management needs to determine only the cost of the ending inventory at the end of the period in order to calculate cost of goods sold.Ĭost of goods sold is the inventory cost to the seller of the goods sold to customers. Companies record purchases, purchase discounts, purchase returns and allowances, and transportation-in throughout the period. Since the ending inventory of the one period is the beginning inventory for the next period, management already knows the cost of the beginning inventory.
To determine the cost of goods sold in any accounting period, management needs inventory information.
Merchandise inventory (also called Inventory) is a current asset with a normal debit balance meaning a debit will increase and a credit will decrease. She writes online courses for professionals seeking CPE hours and has also published the book "Guide to Non-profits: From the Trenches." Her articles have been published in national magazines such as the "Journal of Accountancy," "Architecture Business and Economics" and "Veterinary Economics." Shanker holds a Master of Business Administration.Merchandise inventory is the cost of goods on hand and available for sale at any given time. Sheila Shanker is a certified public accountant based in California. "Accounting Standards Codification: 330 Inventory 10 Overall S99 SEC Materials." Accessed Sept. "Statement of Financial Accounting Concepts No. Accounting Study Guide: Accounting for Inventories.
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