Two entries per sale; returns restore inventory; goods in transit and consignments

Every sale is two entries

Under a perpetual system a sale records what the customer owes and moves the goods' cost off the shelf. On 20 April Bramble Lane Outfitters Ltd. sells 120 headlamps at $40 on account; their cost is $19 each.

Apr 20  Accounts Receivable                4,800
            Sales Revenue                          4,800
Apr 20  Cost of Goods Sold                 2,280
            Inventory                              2,280

The first entry is the one every business makes. The second is the merchandiser's: Cost of Goods Sold takes the 120 × 19, and Inventory gives it up. Forgetting the second entry is the commonest error on this family — it leaves inventory overstated and gross profit equal to sales.

A return comes back in two entries too

On 24 April a customer returns 5 headlamps, undamaged, for credit. Revenue goes down through the contra account, and — because the units are saleable — they go back into Inventory at cost, never at the selling price:

Apr 24  Sales Returns and Allowances         200
            Accounts Receivable                      200
Apr 24  Inventory                             95
            Cost of Goods Sold                        95

5 × 40 = 200 comes off what the customer owes; 5 × 19 = 95 is restored to the asset and taken back out of the expense. If the returned units were damaged beyond resale, only the first entry would be made and the cost would stay in Cost of Goods Sold. An allowance — a price reduction to keep goods the customer is unhappy with — is the first entry alone, with nothing coming back.

The count, and shrinkage

At 31 December the Inventory ledger says 41,300. The count says 40,650. The 650 that the ledger thought was on the shelf is gone — stolen, broken, miscounted at receipt — and the adjusting entry brings the ledger down to reality:

Dec 31  Cost of Goods Sold                   650
            Inventory                                650

Shrinkage is charged to Cost of Goods Sold by default. A store that wants to watch it can use a separate Shrinkage line inside cost of goods sold, but nothing is ever debited to Cash — no cash was involved in losing the goods.

Whose goods are in the count?

A count records what is on the premises. Ownership is what matters, and two situations pull the two apart.

Goods in transit. Bramble Lane bought 2,300 of packs, shipped 29 December FOB shipping point; they arrive 3 January. Title passed at the supplier's dock, so they are Bramble Lane's on 31 December and belong in its inventory though they are on a truck. Had the terms been FOB destination, they would be the supplier's until 3 January and stay out.

Consignments. Bramble Lane displays 1,800 of canoe paddles owned by a local maker, to be paid for only when sold. They are on the shelf and in the count, but they are the maker's — consigned in, they come out of Bramble Lane's inventory. The mirror case: goods Bramble Lane has consigned out to another store are not on its premises, but are still its inventory.

$$40,650+2,300-1,800=41,150$$

That corrected figure is the ending inventory the statements carry — and, in L8.4, the number that closes the year's cost of goods sold.