The following example illustrates how to record journal entries:

Example
Company A was incorporated on January 1, 2010 with an initial capital of 5,000 shares of common stock having $20 par value. During the first month of its operations, the company engaged in following transactions: Date Jan 2 Jan 3 Jan 4 Jan 13 Jan 13 Jan 14 Jan 18 Jan 23 Jan 25 Jan 26 Jan 28 Jan 31 Jan 31 Jan 31 Jan 31 Transaction An amount of $36,000 was paid as advance rent for three months. Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining amount was recognized as a one year note payable with interest rate of 9%. Purchased office supplies costing $17,600 on account. Provided services to its customers and received $28,500 in cash. Paid the accounts payable on the office supplies purchased on January 4. Paid wages to its employees for first two weeks of January, aggregating $19,100. Provided $54,100 worth of services to its customers. They paid $32,900 and promised to pay the remaining amount. Received $15,300 from customers for the services provided on January 18. Received $4,000 as an advance payment from customers. Purchased office supplies costing $5,200 on account. Paid wages to its employees for the third and fourth week of January: $19,100. Paid $5,000 as dividends. Received electricity bill of $2,470. Received telephone bill of $1,494. Miscellaneous expenses paid during the month totaled $3,470

The following table shows the journal entries for the above events. Date Jan 1 Jan 2 Jan 3 Account Cash Common Stock Prepaid Rent Cash Equipment Cash Notes Payable Jan 4 Jan 13 Jan 13 Jan 14 Jan 18 Office Supplies Accounts Payable Cash Service Revenue Accounts Payable Cash Wages Expense Cash Cash 32,900 19,100 19,100 17,600 17,600 28,500 28,500 17,600 17,600 80,000 60,000 20,000 36,000 36,000 Debit 100,000 100,000 Credit

Accounts Receivable Service Revenue Jan 23 Jan 25 Jan 26 Jan 28 Jan 31 Jan 31 Jan 31 Jan 31 Cash Accounts Receivable Cash Unearned Revenue Office Supplies Accounts Payable Wages Expense Cash Dividends Cash Electricity Expense Utilities Payable Telephone Expense Utilities Payable Miscellaneous Expense Cash

21,200 54,100 15,300 15,300 4,000 4,000 5,200 5,200 19,100 19,100 5,000 5,000 2,470 2,470 1,494 1,494 3,470 3,470

At the end of the period, all the journal for the period are posted to

Cost of Goods Sold Journal Entry

Cost of Goods Sold Overview The cost goods sold is the cost assigned to those goods or services that correspond to sales made to customers. In the case of merchandise, this usually means goods that were physically shipped to customers, but it can also mean goods that are still on the company's premises under bill and hold arrangements with customers.

In either case, you need to reduce ending inventory by the amount of those goods that either were shipped to customers or designated as being customer-owned under a bill and hold arrangement. Follow these steps to arrive at the cost of goods sold journal entry: 1. Verify the beginning inventory balance. The actual amount of beginning inventory owned by the company is properly valued and reflects the balances in the various inventory asset accounts in the general ledger. If there is a difference between the beginning balance in

the general ledger and the actual cost of the beginning inventory, the difference will flush out through the cost of goods sold in the current accounting period. 2. Accumulate purchased inventory costs. As the accounting period progresses and you receive invoices from suppliers for inventory items shipped to the company, record them either in a single purchases account or in whichever inventory asset account is most applicable. Be sure to accrue purchases at the end of the accounting period if goods have been received but no supplier invoice. 3. Accumulate and allocate overhead costs. Any other costs involved in bringing sellable inventory to the location and condition needed to sell it are designated asoverhead, and allocated to all items produced during the accounting period. 4. Determine ending inventory units. Either conduct a physical inventory count at the end of the period to determine the exact quantities of items on hand, or use aperpetual inventory system to derive these balances (which typically involves the use of cycle counting). 5. Determine cost of ending inventory. This can be a complicated process, since you may use a variety of cost layering systems, such as FIFO, LIFO, or the weighted average method to determine cost. 6. Determine the cost of goods sold. If you are using a purchases account, then add the balance in that account to the beginning inventory total, and then subtract the costed ending inventory total to arrive at the cost of goods sold. If you are instead using several inventory accounts instead of a purchases account, then add them together and subtract the costed ending inventory total to arrive at the cost of goods sold. 7. Generate cost of goods sold entry. If you are using a purchases account, then the cost of goods sold journal entry should reduce that account balance to zero, as well as adjust the inventory account balance to match the costed ending inventory total. Cost of Goods Sold Journal Entry Example Simple version: ABC International has a beginning balance in its inventory asset account of $500,000. It buys $450,000 of materials from suppliers during the month. At month-end, it counts its ending inventory and determines that there is $200,000 of inventory on hand. The cost of goods sold journal entry is:

Debit Cost of goods sold expense Purchases Inventory 750,000

Credit

450,000 300,000

This entry matches the ending balance in the inventory account to the costed actual ending inventory, while eliminating the $450,000 balance in the purchases account. Advanced version: ABC International has a beginning balance in its inventory asset account of $1,000,000. It buys $350,000 of materials from suppliers during the month, which it records in

the inventory account. At month-end, it counts its ending inventory and determines that there is $475,000 of inventory on hand. In addition, ABC incurs $150,000 of overhead costs, which it records in an overhead cost pool asset account. There are now two cost of goods sold journal entries, of which the first is:

Debit Cost of goods sold expense Purchases Inventory 875,000

Credit

350,000 525,000

The first entry was similar to the transaction noted earlier in the simple version, where we eliminated the balance in the purchases account and altered the ending inventory balance to match the costed amount of ending inventory. In addition, there is $150,000 of overhead to allocate to the items produced during the month. An analysis of produced items reveals that 1/3 were sold and 2/3 retained in inventory. Thus, the cost allocation is:

Debit Inventory Cost of goods sold Overhead cost pool 100,000 50,000

Credit

150,000

Related Topics Accounting inventory methods How do I reconcile inventory? How do I report an inventory write down? What is an inventory reserve? What is backflush accounting?

1Accounting CPE | Contact | Site Map | Copyright 2013, All Rights Reserved

Accrual Process for Period-End Accruals

Key points for accruing expense purchases at period-end include:
o

You record the total uninvoiced receipt liabilities accrued during the accounting period. Actual journal entries are created for the amount of the receipt liabilities, debiting the charge account and crediting the PO distribution accrual account (normally the Expense A/P Accrual Account defined in the Define Purchasing Options form). You reverse accrual journal entries manually at the start of the new accounting period. If you are using encumbrance accounting, purchase order encumbrance is relieved when the invoice(s) matched to the purchase order are posted to the general ledger.

Receiving Transactions
Purchasing does not record any accounting entries for expense during a receiving transaction if you use period-end accruals. You record all of your uninvoiced liabilities at month end using the Receipt Accruals - Period-End process. See: Receipt Accruals - Period End Process

Receipts Accruals-Period End

Use the Receipt Accruals - Period End process to create period-end accruals for your uninvoiced receipts for expense distributions. Purchasing creates an accrual journal entry in your general ledger for each uninvoiced receipt you choose using this form. If you use encumbrance or budgetary control, Purchasing reverses your encumbrance entry when creating the corresponding accrual entry.

Purchasing never accrues an uninvoiced receipt twice. Each time you create accrual entries for a specific uninvoiced receipt, Purchasing marks this receipt as accrued and ignores it the next time you run the Receipt Accrual - Period-End process. Purchasing creates accrual entries only up to the quantity the supplier did not invoice for partially invoiced receipts. Purchasing creates the following accounting entries for each distribution you accrue using the Receipt Accruals - Period-End process:
Account PO charge account @ Uninvoiced Quantity * PO Price Expense A/P accrual account @ Uninvoiced Quantity * PO price Debit Credit XX XX

As soon as you open the next period, Purchasing reverses the accrual entries using the following accounting entries:
Account Debit Credit

Expense A/P accrual account @ Uninvoiced Quantity * PO price XX PO charge account @ Uninvoiced Quantity * PO Price XX

Match, Approve, and Post an Invoice

When you enter an invoice in Payables, you match each invoice line to a specific purchase order shipment in Purchasing. You can set up Payables to ensure that you pay only for the quantity you received. If you accrue your uninvoiced receipts at period-end, Payables records the expense transactions part of the accounting transactions: Account PO Distribution Charge Account @ Invoice Quantity * PO Price Debit Credit XX

PO Distribution Variance Account @ Invoice Quantity * (Invoice Price - PO Price) XX A/P Liability @ (Invoice price * Invoice Quantity) XX

Attention: Normally, you charge the original expense account for any invoice price variances, so your PO distribution variance account is the same as the PO distribution charge account. You do not record invoice price variances for expense purchases. Purchasing uses the Account Generator to set your purchase order distribution variance account to be the same as your purchase order charge account. If you want to record your invoice price variances to a separate account, use the Account Generator to define the business rules you use to determine the correct invoice price variance account.

Complete Period Transactions

If you use encumbrance or budgetary control, Purchasing creates encumbrance journal entries in your general ledger each time you approve a purchase order. Similar to accrual journal entries, encumbrance journal entries recognize a liability towards your supplier before any invoicing transactions occur. Unlike accrual journal entries, encumbrance journal entries are not actual transactions. General Ledger tracks actual and encumbrance journal entries and balances separately.

Period-End Checklist
Purchasing provides you with complete flexibility and control for your period-end accruals. You can use the Uninvoiced Receipts Report to analyze your uninvoiced non-inventory receipts before you

accrue these receipts. You can then use the Receipt Accruals - Period-End process as many times as you want to generate accrual entries for the receipts you choose.

For your period-end reconciliation, you should perform the following steps:
1. Identify the purchasing period you want to reconcile and close. 2. Enter all receiving transactions for goods and services you received during the period. Purchasing automatically creates receipt accruals for all receipts you entered up to the end of this period. To prevent any period-end disruption, Purchasing lets you provide a receipt date that is different from the date you enter the receipts. You never have to enter all the receipts for a period before the end of this period. You can enter these receipts later. You simply need to back date the receipt date. 3. Enter and match all invoices you received during the period for your receipt accrual entries. You should make sure that you solve all posting holds problems in Payables before accruing receipts. Purchasing creates accrual journal entries for all purchase orders you received and did not match to an invoice. If you matched a purchase order to an invoice, Purchasing does not accrue the corresponding receipts. Purchasing does not accrue any purchase order that you closed on or before the end of the accrual period you choose. If the invoice is on posting hold, Payables has not yet accounted for the liability corresponding to the invoice. Under these conditions, the liability corresponding to this invoice would not appear in your books for the period. Payables lets you recognize this liability in the following period. 4. Close your accounts payable period corresponding to the purchasing period for your receipt accrual entries. Note: The List of Values for period end accruals does not require the Accounts Payable period to be closed, however it's strongly recommended that closed periods are used, as the receipt accruals process will not pick up invoices entered after the accruals process is run for the period.rcvaccov 5. For period-end accruals of expense purchases, run the Uninvoiced Receipts Report. Use this report to analyze your uninvoiced receipts. The Uninvoiced Receipts Report lets you use the same selection criteria for your uninvoiced receipts as the Receipt Accruals - Period-End process. You always know exactly what you accrue and for what amount. 6. For period-end accruals of expense purchases, use the Receipt Accruals - Period-End process as many times as you need. You can use the search criteria to choose what you want to accrue and accrue your receipts steps by steps. You create accruals for a specific purchasing period. Purchasing automatically accrues all uninvoiced receipts your entered up to the end of the accrual period you specify. See: Receipt Accruals - Period End Process. Each time you use the Receipt Accruals - Period-End process, Purchasing creates an unposted journal entries batch in your general ledger for your receipt accruals. If you are using encumbrance, Purchasing creates another journal entries batch in your general ledger corresponding to the encumbrance reversal entries for the uninvoiced receipts you accrued. Purchasing never accrues your uninvoiced receipt twice. Each time you create accrual entries for a specific uninvoiced receipt, Purchasing marks this receipt as accrued and

ignores it the next time you use the Receipt Accruals - Period-End process. Purchasing creates accrual entries only up to the quantity your supplier did not invoice for your partially invoiced receipts. 7. Post Accrual and Encumbrance Reversal journal entry batches in your general ledger (See the following section to identify Accrual and Encumbrance Reversal journal entry batches.) 8. Perform all the steps you need to close your accounting period and generate your periodend reports and financial statements in your general ledger. 9. Use your general ledger system to reverse all the receipt accrual and encumbrance reversal batches you created for your period-end accruals. 10. Close the purchasing period for your receipt accruals. When you close a purchasing period, Purchasing automatically un-marks all the receipts you previously accrued to make sure you can accrue these receipts again if they are still uninvoiced in the next period. See: Uninvoiced Receipts Report.

Previous Next

Contents Index Navigation Glossary