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One of the challenges of the periodic inventory method is making appropriate updates to the general ledger (GL). With a computerized perpetual inventory system, the GL is updated automatically, but the periodic system doesn’t allow that. Rather than debiting Inventory, a company using periodic inventory debits a temporary account called Purchases. Any adjustments related to these purchases of goods will later be credited to a GL contra account such as Purchases Discounts or Purchases Returns and Allowances. When the balances of these three purchases accounts (Purchases, Purchase Discounts, and Purchase Returns and Allowances) are combined, the resulting amount is known as net purchases. When goods are sold under the periodic inventory system, there is no entry to credit the Inventory account or to debit the account Cost of Goods Sold. Hence, the Inventory account contains only the ending balance from the previous year. As a result, the company must compute an inventory amount at the end of each accounting period in order to report the amount of its ending inventory for its balance sheet and the cost of goods sold for its income statement. Periodic Inventory SystemIn a periodic system, the Inventory account:
Perpetual Inventory SystemIn a perpetual system, the Inventory account:
Computing the Inventory under the Periodic Inventory MethodAt the end of an accounting year, the company’s ending inventory is normally computed based on a physical count of its inventory items. Inventory amounts for the monthly and quarterly financial statements are usually estimates. Under the periodic inventory system, the cost of goods sold is computed as demonstrated with this example of the Geyer Co.:
Geyer Co.
The following formula is worth committing to memory: [latex]\text{Beginning inventory}+\text{Purchases}-\text{Ending inventory}=\text{Cost of goods sold}[/latex] Compare the above calculation to one from the same company if it used the perpetual system where all transactions run through only two accounts: Merchandise Inventory and Cost of Goods Sold: Income Statement (partial) For the year ended December 31, 20XX
Companies using the periodic inventory system in their GL accounts often have sophisticated inventory systems outside of the GL for tracking the items they purchase, produce, sell, and have on hand. In SummaryThe periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS). The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold. Practice QuestionWhen the perpetual inventory system is used in what account are purchases recorded?In a perpetual inventory system, purchases are recorded in the Merchandise Inventory account. In a periodic inventory system, purchases are recorded in the Purchases account. Identify the four special journals typically used by a business. Purchases journal, cash payments journal, sales journal, cash receipts journal.
What is recorded in perpetual inventory system?A perpetual inventory system is a system used to track and record stock levels, in which every purchase and sale of stock is logged automatically and immediately. In this system, every time a transaction takes place, the software records a change in inventory levels in real-time.
When a perpetual inventory system is used what account does the company debit?When a company uses the perpetual inventory system, the general ledger account Inventory is continually being updated for all the purchases and sales of goods: The costs of the goods purchased are debited to Inventory.
When using the perpetual inventory method when is cost of goods sold recorded?Under the perpetual system, two transactions are recorded at the time that the merchandise is sold: (1) the amount of the sale is debited to Accounts Receivable or Cash and is credited to Sales, and (2) the cost of the merchandise sold is debited to the account Cost of Goods Sold and is credited to Inventory.
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