DR.  INVENTORY

   CR.  A-P/CASH/ACCRUED EXPENSE (DEPENDS ON WHERE ITS COMING OUT OF)

Assume an example as follows:-

Jan.1 Beginning inventory  $500

Purchases of inventory during the year $1000

Journal entry :-

DR Inventory(BS) $1000

CR Cash/AP(BS)        1000

Dec.31 Ending balance of inventory $300

Now, the question is what is accounted for in the income statement. The cost of inventory used for sales is accounted for in income statement.

Thus, cost of goods sold = Beginning Inventory + Purchases - Ending Inventory

= 500 + 1000 - 300 = $1200

Journal entry :-

DR Cost of goods sold (IS) 1200

CR Inventory (BS) 1200

T-account presentation:-

             Inventory account

Balance b/d 500                         Cost of goods sold – IS  1200

                                                 - balancing figure                                                  

Cash - purchases 1000             Balance c/d                    300

                          1500                                                   500

When Accounts Payable is paid (if originally inventory not purchased on cash):-

DR Accounts Payable - AP     1000

CR Cash                                 1000