Accounting Entries for Inventory is and Cost of Goods Sold is Debit the Inventory Account and Credit the Accounts Payable. and Cost of Goods Sold Journal Entry is Debit the Cost of Goods Sold Account and Credit the Inventory Account. Accounting for inventory and cost of goods sold (COGS) is a critical aspect of financial reporting, particularly for businesses that deal with physical products. Below are examples of the necessary journal entries related to inventory and COGS.
1. Purchasing Inventory
When a business purchases inventory, it needs to record the cost of the inventory as an asset.
Example: Purchasing Inventory
Your business purchases $15,000 worth of inventory on August 1, 2024, on credit.
Journal Entry on August 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-01-2024 | Inventory | 15,000 | |
| 08-01-2024 | To Accounts Payable | 15,000 |
Explanation:
- Inventory is debited to record the purchase of inventory as an asset.
- Accounts Payable is credited to reflect the obligation to pay the supplier.
2. Returning Inventory
If some inventory is returned to the supplier, you need to reverse part of the initial purchase.
Example: Returning Inventory
Your business returns $2,000 worth of inventory to the supplier on August 5, 2024.
Journal Entry on August 5, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-05-2024 | Accounts Payable | 2,000 | |
| 08-05-2024 | To Inventory | 2,000 |
Explanation:
- Accounts Payable is debited to reduce the liability since you no longer owe the supplier for the returned inventory.
- Inventory is credited to reduce the inventory account for the returned goods.
3. Recording Cost of Goods Sold (COGS)
When inventory is sold, it is necessary to move the cost of the inventory from the asset account to the expense account (COGS).
Example: Selling Inventory
Your business sells goods worth $12,000 (which originally cost $8,000) on September 1, 2024. The sale is made on credit.
Journal Entry for Sales Revenue on September 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Accounts Receivable | 12,000 | |
| 09-01-2024 | To Sales Revenue | 12,000 |
Explanation:
- Accounts Receivable is debited to record the amount the customer owes.
- Sales Revenue is credited to recognize the revenue earned from the sale.
Journal Entry for COGS on September 1, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-01-2024 | Cost of Goods Sold | 8,000 | |
| 09-01-2024 | To Inventory | 8,000 |
Explanation:
- Cost of Goods Sold is debited to recognize the expense associated with the sale of goods.
- Inventory is credited to reduce the inventory account by the cost of the goods sold.
4. Adjusting Inventory for Shrinkage
Sometimes, businesses experience inventory shrinkage due to theft, loss, or damage. This requires an adjustment to both inventory and COGS.
Example: Inventory Shrinkage
After a physical inventory count, you discover that $500 worth of inventory is missing on December 31, 2024.
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Cost of Goods Sold | 500 | |
| 12-31-2024 | To Inventory | 500 |
Explanation:
- Cost of Goods Sold is debited to account for the lost inventory as an expense.
- Inventory is credited to reduce the inventory balance by the amount of shrinkage.
5. Inventory Write-Down
If the market value of inventory falls below its cost, the inventory must be written down to reflect its lower value.
Example: Inventory Write-Down
On December 31, 2024, your business determines that $1,000 worth of inventory has decreased in value to $700.
Journal Entry on December 31, 2024:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Loss on Inventory Write-Down | 300 | |
| 12-31-2024 | To Inventory | 300 |
Explanation:
- Loss on Inventory Write-Down is debited to recognize the loss in inventory value.
- Inventory is credited to reduce the inventory balance to its current market value.
6. Periodic Inventory System Adjustment
If you are using a periodic inventory system, you must adjust inventory and COGS at the end of the period.
Example: Periodic Inventory Adjustment
At year-end, your business determines that the ending inventory is $10,000. The beginning inventory was $15,000, and purchases during the year totaled $40,000.
Journal Entry to Adjust COGS at Year-End:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Cost of Goods Sold | 45,000 | |
| 12-31-2024 | Inventory (Ending) | 10,000 | |
| 12-31-2024 | To Inventory (Beginning) | 15,000 | |
| 12-31-2024 | To Purchases | 40,000 |
Explanation:
- Cost of Goods Sold is debited to reflect the total cost of inventory sold during the year.
- Inventory (Ending) is debited to record the ending inventory.
- Inventory (Beginning) and Purchases are credited to remove the beginning inventory and record purchases made during the year.
These journal entries help ensure accurate financial reporting related to inventory and cost of goods sold, providing a clear picture of the business’s profitability and inventory management