1. Perpetual Inventory System

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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”

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