Scribd
Upload
884 views19 pages

Periodic and Perpetual Inventory System

The periodic inventory system uses occasional physical counts to measure inventory levels and cost of goods sold. Updates are made at set periods, like monthly or annually. The perpetual system continuously tracks inventory with automatic updates for receipts and sales. Cost of goods sold is also continuously updated. Key differences are that periodic systems only update accounts at periods' end, while perpetual systems provide real-time updates. Perpetual systems also record purchases and returns directly to inventory, while periodic systems use separate accounts. Closing entries are required for periodic systems to update inventory and cost of goods sold amounts.

Uploaded by

Michelle Rotairo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
884 views19 pages

Periodic and Perpetual Inventory System

The periodic inventory system uses occasional physical counts to measure inventory levels and cost of goods sold. Updates are made at set periods, like monthly or annually. The perpetual system continuously tracks inventory with automatic updates for receipts and sales. Cost of goods sold is also continuously updated. Key differences are that periodic systems only update accounts at periods' end, while perpetual systems provide real-time updates. Perpetual systems also record purchases and returns directly to inventory, while periodic systems use separate accounts. Closing entries are required for periodic systems to update inventory and cost of goods sold amounts.

Uploaded by

Michelle Rotairo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 19

Periodic and Perpetual Inventory

System
Periodic Inventory System
● The periodic system uses an occasional physical count to measure the level of
inventory and the cost of goods sold (COGS).
● Merchandise purchases are recorded in the purchases account. The inventory
account and the cost of goods sold account are updated at the end of a set
period—this could be once a month, once a quarter, or once a year.
● Cost of goods sold is an important accounting metric, which, when subtracted
from revenue, shows a company's gross margin
Perpetual Inventory System
● By contrast, the perpetual system keeps track of inventory balances
continuously, with updates made automatically whenever a product is received
or sold.
● Purchases and returns are immediately recorded in the inventory account. As
long as there is no theft or damage, the inventory account balance should be
accurate.
● The cost of goods sold account is also updated continuously as each sale is
made.
● Perpetual inventory systems use digital technology to track inventory in real
time using updates sent electronically to central databases.
Comparison of Periodic and Perpetual Inventory System
1. Sold merchandise on account costing P8,000 for P10,000 terms were 2/10,
n/30
2. Customer returned merchandise costing P400 that had been sold on account for
P500 (part of the P10,000 sale).
3. Received payment from customer for merchandise sold above.
4. Purchase on account merchandise for resale for P6,000 terms were 2/10, n/340
(purchases recorded at invoice price)
5. Paid P200 freight on the P6,000 purchase. Terms were FOB shipping point,
freight collect.
6. Returned merchandise costing P300 (part of the P6,000 purchase. )
7. Paid for merchandise purchased, refer to no.4 (cash discount taken :(P6,000
purchase - P300 return x 2%discount = P114):
8. To transfer the beginning inventory balance to the income summary account (part
of the closing entry under the periodic inventory system. )
9. To record the ending inventory balance (part of the closing entries under the
periodic inventory system)
10. To adjust the ending perpetual inventory balance for the shrinkage during the
year
Differences Between Perpetual and Periodic System
● Inventory Account and Cost of Goods Sold Account are used in both systems but
they are updated continuously during the period in perpetual inventory system
whereas in periodic inventory system they are updated only at the end of the
period.
● Purchases Account and Purchase Returns and Allowances Account are only used
in periodic inventory system and are updated continuously. In perpetual inventory
system purchases are directly debited to inventory account and purchase returns
are directly credited to inventory account.
● Sale Transaction is recorded via two journal entries in perpetual system. One of
them records the sale value of inventory whereas the other records cost of goods
sold. In periodic inventory system, only one entry is made.
● Closing Entries are only required in periodic inventory system to update inventory
and cost of goods sold. Perpetual inventory system does not require closing entries
for inventory account.
Worksheet in a Perpetual Inventory System
1. The inventory amount in the trial balance is the year-end balance since the
inventory account is perpetually updated. There will be no merchandise
inventory adjusting or closing entry unlike when the periodic inventory system
is used. The year-end inventory balance will simply be extended to the debit
column of the balance sheet.
2. The cost of goods sold is a ledger account in perpetual system. There will be no
accounts for purchases, purchase returns and allowances, purchase discounts
and freight-in because information related to these items are recorded directly
recorded in the inventory account. When the closing entries are made, cost of
goods sold will be closed with other temporary accounts with debit balances.
3. The adjustments are handled in exactly the same way as they are handled in the
periodic worksheet.
4. An adjusting entry is necessary when the year-end inventory account balance
does not tally with the physical inventory account.

You might also like