12/16/2023 0 Comments Summarize a periodic inventory system![]() When a difference between the balance of inventory account and physical count of inventory is found:įor further explanation of the concept of perpetual inventory system, consider the following example: Example: The return of goods from customers to seller also involves two journal entries – one to record the sales returns and allowances and one to reverse the transfer of cost from inventory to COGS account. The sale involves two journal entries – one to record the sale which is the same as made under periodic inventory system and one to transfer the cost of inventory from inventory account to cost of goods sold (COGS) account. When expenses such as freight-in, insurance etc. The set of journal entries involved starting from purchase to sale of goods under perpetual inventory system is given below: Journal entries in a perpetual inventory system: However, advanced computer software packages have made its use easy for almost all business situations and the companies selling any kind of inventory can now benefit from the system. ![]() Traditionally, the perpetual inventory system was used by companies that buy and sell easily identifiable inventories such as jewellery, clothing and appliances etc. Merchandising companies use this system to maintain the record of merchandising inventory and manufacturing companies use it to account for purchase and consumption of their manufacturing inputs like direct materials and supplies etc. The common reasons of such difference include inaccurate record keeping, normal shrinkage, and shoplifting etc.īoth merchandising and manufacturing companies can benefit from perpetual inventory system. If a difference is found between the balance in inventory account and the physical count, it is corrected by making a suitable journal entry (illustrated by journal entry number 6 given below). The accuracy of this balance is periodically assured by a physical count – usually once a year. ![]() The balance in inventory account at the end of an accounting period shows the cost of inventory in hand. The journal entry for this transfer looks like the following: ![]() Each time the merchandise is sold, the related cost is transferred from inventory account to cost of goods sold account by debiting cost of goods sold and crediting inventory account. The general examples of such expenses include freight-in and insurances expense etc. These expenses are, therefore, also debited to inventory account under this system. Under perpetual inventory system, the expenses that are incurred to obtain merchandise inventory are added to the cost of merchandise available for sale. Under this system, no purchases account is maintained because inventory account is directly debited with each purchase of merchandise. Perpetual inventory system is a technique of maintaining inventory records that provides a running balance of cost of goods available for sale and cost of goods sold for a period. ![]()
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