Perpetual Inventory System

Periodic Inventory System So far we have looked at the Periodic Inventory System Updates to the Merchandise Inventory account are made only ‘periodically’ specifically at the end of the fiscal period

Perpetual Inventory System Merchandise Inventory numbers are recalculated after each purchase More accurate, always aware of exact amount of product available More expensive to acquire suitable technology Expense (COGS) is recorded as soon as this asset is decreased

Periodic vs. Perpetual Inventory System • Inventory is counted from time to time (periodically) • the result is used to calculate Cost of Goods Sold Perpetual • Inventory changes are recorded in an account on an ongoing (perpetual) basis • A ledger account is used for Cost of Goods Sold Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Perpetual Inventory System—Selling Goods Sales have two aspects or portions Example Merchandise that is purchased for $100 is sold for $150, generating a $50 gross profit • The cost of selling merchandise is recorded with each sale. • The reduction of the inventory value is also recorded with each sale Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Basic Periodic/Perpetual Entries Compared Sale Example Merchandise is sold for $4500, twice the price it cost (sales invoice) • The cost of the sale and the asset reduction are ignored for now Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Basic Periodic/Perpetual Entries Compared Sales Returns/Allowances Example Customer returns $900 (costing $450) worth of merchandise (credit invoice) - Periodic Inventory System Perpetual Inventory System DR CR Sales Returns and Allowances 900 HST Payable 117 Accounts Receivable 1017 DR CR Sales Returns and Allowances 900 HST Payable 117 Merchandise Inventory 450 Cost of goods Sold Accounts Receivable 1017 Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Basic Periodic/Perpetual Entries Compared Purchase Example Merchandise is bought for $4500 (purchase invoice) • Transaction details are recorded directly in the Merchandise Inventory account. The Purchases account is eliminated. Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Basic Periodic/Perpetual Entries Compared Purchase Returns/Allowances Example We return $900 worth of merchandise to our supplier(credit invoice) - Periodic Inventory System Perpetual Inventory System DR CR Accounts Payable 1017 Purchase Returns & Allowances 900 HST Recoverable 117 DR CR Accounts Payable 1017 Merchandise Inventory 900 HST Recoverable 117 Chapter 10 – Accounting for a Merchandising Business | Accounting 1, 7th Edition

Issues The problem with this method is you need to make an assumption on the cost of that merchandise That item could have been from any shipment costing varying amounts This issue is handled in Grade 12, your textbook will assign a standard cost value for all products in the entire question

Spoilage If you are constantly updating the inventory amounts, your ending inventory would only account for sold merchandise. A grocery store for example could have product that needed to be thrown out Companies would also have left out product that was removed due to theft An inventory count therefore must still be taken, with the difference from Merchandise Inventory having to be debited to “Spoilage Expense”

Homework Page 304 # 11c, 12d, any other outstanding HW