12 - FIFO & LIFO (Cost Layering Methods)

Accounting 101 with Jimmy Stewart

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