Perpetual inventory – Adjusting the Merchandise Inventory account

Perpetual inventory: Adjusting the Merchandise Inventory account

When the perpetual inventory system is used to keep track of inventory, all transactions involving purchases and sales of inventory are recorded in Merchandise Inventory. The balance in the Merchandise Inventory account is called the current book balance. At the end of each fiscal period, merchandising businesses take a physical count of all merchandise on hand. Typically there is a difference between the book balance and the physical count. This might be due to a number of reasons such as theft or short shipments.

As stated above, the Merchandise Inventory account had a balance of $73,200. However, when a physical count was taken, the balance on hand was only $72,980. An adjusting entry is required to update or properly state the Merchandise Inventory account and to charge the difference of $220 ($73,200 – $72,980) to an expense account.


Debit Cost of Goods Sold: The Cost of Goods Sold account is debited (increased).

Some companies view the loss as a cost of purchasing the goods, and thus it is included in the Cost of Goods Sold (COGS) account. In this case, the Cost of Goods Sold account is debited (increased). However, other companies view this as an expense–a cost of selling the inventory, i.e., an operational expense. If a company views this loss as an operational expense, the Loss Due to Inventory Shrinkage account is used to record the loss. Both methods are acceptable.

Credit Merchandise Inventory: The Merchandise Inventory account is credited (decreased).

Merchandise Inventory is decreased to reflect the fact that there is less inventory on hand than the book balance shows.

Therefore, the answer is: 

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