Accounting for Inventory Sales? 

How do we recognize the events that happen typically in a merchandising business? To undertake this process, you must know how to convert journal entries into T tables. 

First, you must record the purchase of inventory. I will debit the inventory account (which is an asset account). Then I'm going to credit however I pay for that inventory - maybe it's cash (an asset account) or maybe it's accounts payable (a liability account). 

When we sell inventory it involves two steps. At a minimum four counts will be affected. 

Steps in Recording Sale of Inventory

Step 1

I am going to debit the account representing however I was paid for the amount I was paid. That could be cash or accounts receivable. 

Step 2

Next, I'm going to credit the account for sales or sales revenue ( an income statement account). 

Step 3

The next step is to recognize the expense side of it by debiting the Cost of Goods Sold (COGS) (which is an income statement account). Remember, we did not expense the inventory when we purchased it - only once you use it. Once we sell it, we have to expense the cost of the inventory for however much you paid for the goods. There are a couple of methods for determining the cost to you - known as LIFO and FIFO, but this is discussed later. 

Step 4

So, I'm have to credit Merchandise Inventory or Inventory to show the cost of the inventory that was sold. Inventory is an asset account, so crediting it will make it go down. 

Related Topics

• What is Merchandising? – Financial Accounting
• Recognizing Inventory Sales – Financial Accounting
• Perpetual vs Period Systems – Financial Accounting
• Special Merchandising Transactions – Financial Accounting
• Adjustments for Inventory – Financial Accounting
• Multi-Step Income Statement – Financial Accounting
• Accounting Cycle for Merchandising Business Example Part 1
• Accounting Cycle for Merchandising Business Example Part 2
• Accounting Cycle for Merchandising Business Example Part 3