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6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System

Selling Merchandise​

When a merchandising business sells inventory, it must record:

  • The sale (revenue and receivable/cash)
  • The cost of goods sold (reduction in inventory)
  • VAT on the sale

Basic Sale Transaction​

Transaction: Sell merchandise for cash

Example: Retail store sells €1,000 of clothing for cash (excluding VAT), VAT 17%. Cost of goods sold is €600.

Journal Entries (Two Entries):

Entry 1: Record the Sale

510000 Cash                       €1,170
700000 Sales Revenue (Class 7)              €1,000
430000 VAT Payable (Class 4)                    €170
To record cash sale of merchandise

Entry 2: Record Cost of Goods Sold

602000 Cost of Goods Sold (Class 6) €600
321000 Inventory (Class 3)                    €600
To record cost of merchandise sold

PCN Accounts:

  • 510000: Cash (Class 5)
  • 700000: Sales Revenue (Class 7)
  • 430000: VAT Payable (Class 4)
  • 602000: Cost of Goods Sold (Class 6)
  • 321000: Inventory (Class 3)

After Entries:

  • Sales Revenue: €1,000
  • Cost of Goods Sold: €600
  • Gross Profit: €400
  • Inventory reduced by €600

Sale on Credit​

Transaction: Sell merchandise on credit

Example: Sell €2,000 merchandise on credit (excluding VAT), VAT 17%. Cost is €1,200.

Journal Entries:

Entry 1: Record the Sale

410000 Accounts Receivable        €2,340
700000 Sales Revenue                          €2,000
430000 VAT Payable                              €340
To record credit sale of merchandise

Entry 2: Record Cost of Goods Sold

602000 Cost of Goods Sold         €1,200
321000 Inventory                              €1,200
To record cost of merchandise sold

Sales Returns and Allowances​

Sales Return: Customer returns merchandise

Example: Customer returns €500 of merchandise (excluding VAT) that was sold for €500 with cost of €300.

Journal Entries:

Entry 1: Reverse the Sale

700000 Sales Returns (or reduce Sales) €500
430000 VAT Payable                             €85
410000 Accounts Receivable (or 510000 Cash)            €585
To record return of merchandise

Entry 2: Return Inventory

321000 Inventory                  €300
602000 Cost of Goods Sold                     €300
To return merchandise to inventory

PCN Note: Sales Returns can be:

  • Separate account: 702000 Sales Returns (Class 7 - contra-revenue)
  • Or netted against Sales Revenue

Sales Allowance: Price reduction for damaged goods kept by customer

Example: Give €100 allowance (excluding VAT) for slightly damaged goods.

Journal Entry:

703000 Sales Allowances (Class 7)  €100
430000 VAT Payable                             €17
410000 Accounts Receivable (or 510000 Cash)            €117
To record sales allowance

Note: No inventory adjustment (customer keeps goods).

Sales Discounts​

Sales Discount: Discount for early payment by customer

Example: Sale of €5,000 on credit, terms 2/10, n/30. Customer pays within 10 days.

Initial Sale:

410000 Accounts Receivable        €5,850
700000 Sales Revenue                          €5,000
430000 VAT Payable                              €850

Payment Within Discount Period:

510000 Cash                       €5,733
703000 Sales Discounts (Class 7)    €100  (2% of €5,000)
410000 Accounts Receivable                    €5,850
To record payment within discount period
(VAT already recorded on original sale)

PCN Note: Sales Discounts: 703000 (Class 7 - contra-revenue)

Luxembourg VAT on Sales​

Different VAT Rates for Different Merchandise:

Example: Restaurant Selling Different Items

Transaction: Restaurant sells:

  • Food (dine-in): €100 (excluding VAT), VAT 3%
  • Wine: €50 (excluding VAT), VAT 14%
  • Takeaway food: €30 (excluding VAT), VAT 8%

Journal Entry:

510000 Cash                       €195.40
701000 Service Revenue (Food)                €100.00
701000 Service Revenue (Beverage)             €50.00
701000 Service Revenue (Takeaway)             €30.00
430000 VAT Payable                              €15.40
To record sales with different VAT rates
(VAT: €3.00 + €7.00 + €2.40 + €3.00 = €15.40)

Cost Entries (if applicable):

602000 Cost of Goods Sold         €[cost]
321000 Inventory                              €[cost]

Net Sales Calculation​

Net Sales = Gross Sales - Sales Returns - Sales Allowances - Sales Discounts

Example:

  • Gross Sales: €50,000
  • Sales Returns: €2,000
  • Sales Allowances: €500
  • Sales Discounts: €1,000
  • Net Sales: €50,000 - €2,000 - €500 - €1,000 = €46,500

Luxembourg Compliance Note​

When selling merchandise in Luxembourg:

  • Record revenue at net amount (excluding VAT)
  • Record VAT Payable at correct rate
  • Record cost of goods sold immediately (perpetual system)
  • Use correct VAT rate for each item type
  • Maintain proper documentation
  • Track sales by VAT rate for VAT return preparation

Think It Through​

A Luxembourg retail store sells a children's T-shirt (3% VAT) for €20 and an adult T-shirt (17% VAT) for €30. The cost of the children's shirt was €10, and the adult shirt was €15. Record both sales with proper VAT and cost of goods sold entries.