Understand Inventory Control Method s PowerPoint #2

Perpetual Inventory System  Inventory is continuously updated.  Used by a majority of businesses  When new merchandise is purchased, the Inventory Account,not the Purchases Account, is immediately debited.  There are two journal entries when goods are sold:  The items are immediately removed from the Inventory Account and placed in the Cost of Good Sold Account.  The sale is credited to Sales and debited to Cash or Accounts Receivable.  A stock record is used to show the type of merchandise, quantity received, quantity sold, and balance on hand.

Periodic Inventory System  Also called a physical inventory  Determined by physically counting, weighing, or measuring items or merchandise on hand  As inventory is purchased, it is debited to the Purchases account.  Purchases account is shown in the Cost of Goods Sold section  Purchases account is closed to the Inventory Account at the end of the year.

 When merchandise is sold to customers  There is only one journal entry.  Debit Cash or Accounts Receivable and Credit Sales.  No adjustment to Inventory or Cost of Goods Sold is needed.  The adjustment will be made at the end of the year.  Inventory Records are used to record information for Periodic Inventories.  Periodic Inventories are expensive to conduct, especially for businesses with large inventories.  Companies that use the Perpetual Inventory system take a Physical Inventory as least once per year.

 Explain the concept of a Perpetual Inventory system.  Explain the concept of a Periodic Inventory system.  How does the Perpetual Inventory system differ from the Periodic Inventory system?  How are the two systems similar?  Why is a Periodic or Physical Inventory necessary, even for Perpetual systems?