Furthermore, the methods for valuing inventory (such as FIFO, LIFO, or weighted average) can also impact the journal entries.
In practice, inventory transactions can be more complex, involving sales discounts, sales returns and allowances, freight costs, and other considerations. Note that the actual sales price ($Y) is typically higher than the cost of the inventory sold ($Z), reflecting the company’s profit on the sale. In all these entries, $X, $Y, and $Z represent the relevant amounts for each transaction. When the company later receives payment from the customer, it decreases (credits) Accounts Receivable and increases (debits) Cash. Receipt of Payment for Inventory Sold on Credit: Simultaneously, it records an increase in Accounts Receivable (debit), reflecting the amount the customer owes, and an increase in Sales Revenue (credit), reflecting the revenue from the sale. When the company sells inventory to a customer on credit, it records a decrease in Inventory (credit) and an increase in Cost of Goods Sold (COGS) (debit), reflecting the cost of the inventory sold.
