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6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System

Purchasing Merchandise​

When a merchandising business purchases inventory, it must record:

  • The cost of the merchandise
  • Any freight costs
  • VAT (if recoverable)
  • Payment terms

Basic Purchase Transaction​

Transaction: Purchase merchandise on credit

Example: Retail store purchases €5,000 of clothing on credit from supplier (excluding VAT), VAT 17%, recoverable.

Journal Entry:

321000 Inventory (Class 3)         €5,000
431000 VAT Recoverable (Class 4)    850
400000 Accounts Payable (Class 4)            €5,850
To record purchase of merchandise on credit

PCN Accounts:

  • 321000: Merchandise (Class 3 - Asset)
  • 431000: VAT Recoverable (Class 4 - Asset)
  • 400000: Accounts Payable (Class 4 - Liability)

Purchase with Cash Payment​

Transaction: Purchase merchandise, paying cash

Example: Purchase €2,000 merchandise, paying cash (excluding VAT), VAT 17%, recoverable.

Journal Entry:

321000 Inventory                   €2,000
431000 VAT Recoverable              340
510000 Cash (Class 5)                          €2,340
To record purchase of merchandise for cash

Purchase Returns and Allowances​

Purchase Return: Returning merchandise to supplier

Example: Return €500 of defective merchandise (excluding VAT) from previous purchase.

Journal Entry:

400000 Accounts Payable            €585
321000 Inventory                               €500
431000 VAT Recoverable                          €85
To record return of merchandise to supplier

Note: Reduces inventory and accounts payable. VAT recoverable is also reduced.

Purchase Allowance: Price reduction for damaged goods kept

Example: Receive €200 allowance for slightly damaged goods (excluding VAT).

Journal Entry:

400000 Accounts Payable            €234
321000 Inventory                               €200
431000 VAT Recoverable                          €34
To record purchase allowance

Purchase Discounts​

Purchase Discount: Discount for early payment

Example: Purchase €10,000 merchandise, terms 2/10, n/30 (2% discount if paid within 10 days, net 30 days).

Initial Purchase:

321000 Inventory                  €10,000
431000 VAT Recoverable             1,700
400000 Accounts Payable                       €11,700

If Paid Within 10 Days (Taking Discount):

400000 Accounts Payable           €11,700
321000 Inventory                                  €200  (2% of €10,000)
431000 VAT Recoverable                             €34  (VAT on discount)
510000 Cash                                       €11,466
To record payment within discount period

Note: Discount reduces inventory cost (not a separate revenue account).

If Paid After 10 Days (No Discount):

400000 Accounts Payable           €11,700
510000 Cash                                       €11,700
To record payment after discount period

Luxembourg VAT Considerations​

Different VAT Rates:

  • Standard rate: 17%
  • Reduced rates: 14%, 8%, 3%

Example: Restaurant Purchasing Different Items

Transaction: Restaurant purchases:

  • Food ingredients: €1,000 (excluding VAT), VAT 3%
  • Wine: €500 (excluding VAT), VAT 14%
  • Equipment: €2,000 (excluding VAT), VAT 17%

Journal Entry:

321000 Inventory - Food            €1,000
321000 Inventory - Beverages         500
223000 Equipment                   2,000
431000 VAT Recoverable               470  (€30 + €70 + €340)
400000 Accounts Payable                         €3,970
To record purchases with different VAT rates

VAT Calculation:

  • Food: €1,000 × 3% = €30
  • Wine: €500 × 14% = €70
  • Equipment: €2,000 × 17% = €340
  • Total VAT: €440

PCN Note: May use sub-accounts for different inventory types:

  • 321001: Food Inventory
  • 321002: Beverage Inventory
  • Or track separately for VAT purposes

Luxembourg Compliance Note​

When purchasing merchandise in Luxembourg:

  • Record net cost (excluding VAT) in inventory
  • Record VAT Recoverable separately (431000)
  • Use correct VAT rate for each item
  • Maintain proper documentation
  • Ensure VAT can be recovered (business use)
  • Track different inventory types if different VAT rates apply

Think It Through​

A Luxembourg retail store purchases children's clothing (3% VAT) and adult clothing (17% VAT) in the same transaction. How should this be recorded? What PCN accounts are involved?