5a. the perpetual inventory system
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8/13/2019 5a. the Perpetual Inventory System
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The Perpetual Inventory System
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Perpetual Inventory
Reminder: The perpetual inventory systemkeeps track of inventoryand cost of goodssoldon a continuous basis during the fiscal
period Rather than period
Uses software systems, bar codes
Costly to set up, saves in time and effort Accounting is simpler....
......in my opinion
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Perpetual Inventory
The Perpetual inventory system uses two
accounts that we have not studied in detail
1. Merchandise Inventory
2. Cost of Goods Sold
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Merchandise Inventory
The account will keep track of the cost of all
merchandise that is currently owned by the
business
Is classified as an ASSET
A current asset to be more specific
Why?
Thus, appears on the balance sheet
Thus, is a debit account
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Cost of Goods Sold
Not to be confused with the figure we calculateon the income statement in the Periodic IncomeStatement ....yes, they are differentmore tomorrow
One of the reasons I say the perpetual system iseasier for accountants No need to calculate Cost of Goods Sold
Kept Track of the entire fiscal period
Is an expense (non operating) A normal cost of doing business
Appears on the I/S
Has a debit balance
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Perpetual Inventory
We are going to go through the sametransactions we have discussed this week withthe periodic inventory system
1. Purchase of Goods2. Selling of Goods
3. Return of Goods
4. Shipping of Goods
Plus!!!
5. Inventory Shortage
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The Perpetual Inventory Method
Cash Purchase of Inventory
Jun. 8Purchases sports equipment from Schwinn,
$500, Cheque 86
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jun 8 Merchandise Inventory 500
Cash 500
Purchased Sports Equipment,
Cheque 86
Notice, we now use the Merch. InventoryAccountinstead of the Purchases Account
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The Perpetual Inventory Method
Credit Purchase of Merchandise
Jun. 9Purchases sports equipment from Spalding,
invoice 2974, $200 on account
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jun 9 Merchandise Inventory 200
A/P Spalding Ltd. 200
Purchases Equipment, Invoice
2974
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Selling of Goods
Reminder: With the Periodic Systemtherewas no change to our journal transaction
The selling of goods gets more complicated
with the Perpetual System The accountant must record
The affect in the inventory account
The amount it cost us to purchase that specificinventory
2 different transactions for every sale!!
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The Perpetual Inventory Method
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
Jan 10 Cash 1130
HST Payable 130
Sales Revenue 1000
Merchandise Inventory 700
Cost of Goods Sold 700
This is to keep our inventory up-to-date with every sale,sales discount, or sales return
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Return of Goods
From the merchandising business perspective
When returning goods to the supplierall we
need to do is show the affect on our inventory
When customers return goods to uswe add the
goods back into our inventory
Does this make sense?
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The Perpetual Inventory Method
Goods returned for Credit (Purchase Returns &Allowances)
Jun. 11Received Credit Invoice 981 for $200 from
Spalding Ltd. for returned tennis equipment.
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jun 11 A/P Spalding Ltd 200
Merchandise Inventory 200
Merchandise return, credit
invoice 981
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The Perpetual Inventory Method
Goods returned to our business (Sales Returns &Allowances)
Jun. 11Sent Credit Invoice 681 for $40 to T.
Ranasorusrex for returned tennis equipment.
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jun 11 Merchandise Inventory 200
A/R T. Ranasorusrex 200
Merchandise return, credit
invoice 681
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Freight
When shipping goodsthe accountant has to
add the cost of the shipping to the overall cost
of the inventory
Perpetualadded into the COGS section on the
I/S
Periodwill ultimately make its way into our
COGS figure, but to do so, we add it to the cost ofour merchandise inventory
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The Perpetual Inventory Method
Freight In
Freight In is part of the Cost Of Goods Sold Account, sowe now use Merchandise Inventory instead
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jun 16 Merchandise Inventory 200
Cash 200
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Inventory Shortage
Unfortunately, we may discover that the
amount of inventory is short
For what reasons?
This happens in business
Owners try to minimize their effects and the
amount of inventory that goes missing, but it will
occur
What accounts do you think are affected?
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The Perpetual Inventory Method
Inventory Shortage
It is discovered that the storage room is short $75worth of lacrosse equipment
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jun 16 Inventory Shortage 75
Merchandise Inventory 75
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Homework
Perpetual Worksheet
Complete all transactions for tomorrow
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