Accounting Practices 501 Chapter 6 Inventory (Perpetual system) Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

Perpetual System Ch6C - Perpetual system 2 This is a computerised systems, whereby the stock is constantly updated with each transaction Inventory

Perpetual System Continuous record of inventory on hand is kept Computerised system Uses an Inventory asset account Cost of goods sold updated with each transaction Still need stock takes (theft, loss, damage) Ch6C - Perpetual system 3

4 General Journal Date Account Titles Ref noDebitCredit 1/3 Inventory8,000 Accounts Payable – AB Stores 9,200 GST Paid 1,200 1 March: Purchase inventory on credit from AB Stores, $9,200 Let’s do an example using General Journal entries

Ch6C - Perpetual system 5 General Journal Date Account Titles Ref noDebitCredit 1/3 Inventory8,000 Accounts Payable – AB Stores 9,200 GST Paid 1,200 The Inventory account is immediately updated and shows the current value Date General Ledger Details Ref noDrCrBal INVENTORY 1/3Accounts Payable 8,000Dr 8,000

Ch6C - Perpetual system 6 When a sale takes place two things happen in a perpetual inventory system 1. The sale is recorded 2. The Inventory is updated

Ch6C - Perpetual system 7 General Journal Date Account Titles Ref noDebitCredit 3/3 Accounts Receivable – Mrs X1,840 Sales 1,600 GST Collected March: Sold goods to Mrs X, $1,840, cost of goods sold $1,000 3/3 Cost of Sales1,000 Inventory 1,000 Inventory will have to be decreased as the goods have moved out with the customer

Ch6C - Perpetual system 8 General Journal Date Account Titles Ref noDebitCredit 3/3 Accounts Receivable – Mrs X1,840 Sales 1,600 GST Collected 240 3/3 Cost of Sales1,000 Inventory 1,000 The Inventory acct was immediately updated and shows the current value The Cost of Sales will be used to determine the Gross profit Date General Ledger Details Ref no DrCrBal Inventory 1/3Accounts Payable 8,000Dr 8,000 3/3Cost of Sales 7,000Dr 1,000 Cost of Sales 3/3Inventory 1,000Dr 1,000

Stock take Ch6C - Perpetual system 9 Even with a perpetual system, a stock take is still needed at least once a year Theft or errors could have occurred Internal Controls should be in place to prevent this

Stock take Ch6C - Perpetual system 10 Theft or errors could have occurred Internal Controls should be in place to prevent this What if the actual stock figures differ from the stock value in the system?

Stock take Ch6C - Perpetual system 11 We then do an adjustment in the General Journal General Journal Date Account Titles Ref noDebitCredit 1/3 Inventory variance3,000 Being entry required to record stock loss Inventory 3,000 The Inventory account will be decreased with the loss