12 - FIFO & LIFO (Cost Layering Methods)

12.07.2018 - By Accounting 101 with Jimmy Stewart

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Today we will discuss the cost layering methods that are used within the periodic and perpetual inventory systems.

Assumptions for purchases:

50 units purchased on January 1 at $10 each (50 x $10 = $500)
100 units purchased on February 1 at $11 each (100 x $11 = $1,100)
150 units purchased on March 1 at $12 each (150 x $12 = $1,800)

Assumptions for sales:

250 units sold to customer on April 1 for $5,000

Journal entries to record purchases under Periodic Method (entry is the same whether LIFO or FIFO is being used):

January 1: Debit Purchases $500; Credit Accounts Payable $500

February 1: Debit Purchases $1,100; Credit Accounts Payable $1,100

March 1: Debit Purchases $1,800; Credit Accounts Payable $1,800

Total Debits to Purchases = $3,400 ($500 + $1,100 + $1,800)

Journal entries to record purchases under the Perpetual Method (entry is the same whether FIFO or LIFO is being used):

January 1: Debit Inventory $500; Credit Accounts Payable $500

February 1: Debit Inventory $1,100; Credit Accounts Payable $1,100

March 1: Debit Inventory $1,800; Credit Accounts Payable $1,800

Total Debits to Inventory = $3,400 ($500 + $1,100 + $1,800)

Journal entry to record sale - Periodic Method (entry is the same whether using FIFO or LIFO):

April 1: Debit Accounts Receivable $5,000; Credit Revenue $5,000

Adjusting journal entry to record Cost of Goods Sold and Inventory - Periodic Method (Using FIFO):

December 31: Debit Inventory $600 (for ending inventory); Debit Cost of Goods Sold for $2,800; Credit Purchases for $3,400; Credit Inventory for $0 (for beginning inventory)

Adjusting journal entry to record Cost of Goods Sold and Inventory - Periodic Method (Using LIFO):

December 31: Debit Inventory $500 (for ending inventory); Debit Cost of Goods Sold for $2,900; Credit Purchases for $3,400; Credit Inventory for $0 (for beginning inventory)

Journal entries to record sale - Perpetual Method (FIFO):

April 1: Debit Accounts Receivable $5,000; Credit Revenue $5,000

April 1: Debit Cost of Goods Sold $2,800; Credit Inventory $2,800

Journal entries to record sale - Perpetual Method (LIFO):

April 1: Debit Accounts Receivable $5,000; Credit Revenue $5,000

April 1: Debit Cost of Goods Sold $2,900; Credit Inventory $2,900

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