Hodgson Industrial Design is using a standard costing system to calculate its inventory balances and cost of goods sold. The company conducts a month end physical inventory count that results in a reasonably accurate set of unit quantities for all inventory items. The cost accountant multiplies each of these unit quantities by their standard costs to derive the ending inventory valuation. This ending balance is $2,500,000.
The beginning inventory account balance is $2,750,000 and purchases during the month were $1,000,000, so the calculation of the cost of goods sold is:
|
Beginning inventory |
$2,750,000 |
|
+ Purchases |
1,000,000 |
|
Ending inventory |
(2,500,000) |
|
= Cost of goods sold |
$1,250,000 |
To record the correct ending inventory balance and cost of goods sold, Hodgson records the following entry, which clears out the purchases asset account and adjusts the ending inventory balance to $2,500,000:
|
Debit |
Credit |
|
|
Cost of goods sold |
1250000 |
|
|
Purchases |
1000000 |
|
|
Inventory |
41,000 |
250000 |