Perpetual vs Periodic Inventory System
Perpetual inventory system and periodic inventory systems are the two systems of
keeping records of inventory.
In perpetual inventory system, merchandise inventory and cost of goods sold are
updated continuously on each sale and purchase transaction. Some other transactions
may also require an update to inventory account for example, sale/purchase return,
purchase discounts etc. Purchases are directly debited to inventory account whereas
for each sale two journal entries are made: one to record sale value of inventory and
other to record cost of goods sold. Purchases account is not used in perpetual
inventory system. This is normally adapted by a business which sells high priced-low
volume goods such as cars and appliances. Inventory is continuously recorded and
monitored to ensure better control over the stock. Since the balance of a particular
inventory item is available anytime, an inventory count would easily show if this
agrees with the inventory balance. A shortage would immediately trigger an
investigation.
In periodic inventory system, merchandise inventory and cost of goods sold are not
updated continuously. Instead purchases are recorded in Purchases account and each
sale transaction is recorded via a single journal entry. Thus cost of goods sold account
does not exist during the accounting period. It is determined at the end of accounting
period via a closing entry. This is normally adapted by businesses selling low price
– high volume goods such as goods sold in supermarket, hardware store or drugstore.
Differences Between Perpetual and Periodic System
Following are the main differences between perpetual and periodic inventory
systems:
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.
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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.
Illustration:
During the year, total purchases amounted to P50,000 representing 200 chairs
bought at P250 each. At the end of the year, a physical count showed 70 chairs remain
on hand. Cost of sales is assigned as follows:
Purchases (200 x P250) P50,000
Less: Merchandise Inventory, Dec. 31(70 x P250) 17,500
Cost of Goods Sold (130 x P250) P32,500
The unsold merchandise representing merchandise inventory at the end of the
year for P17,500 will presented in the statement of financial position.
For the sales revenue, assume the merchandise was sold 50% above cost, or a
mark-up of P125, then sales price will be (P250 + P125) = P 375. Gross profit
will then be computed as follows:
Sales (130 x P375) P48,750
Less: Cost of sales 32,500
Gross Income on Sales P16,250
Entries to record the aforementioned transactions:
Perpetual Method Periodic Method
Merchandise Inventory P50,000 Purchases P50,000
Cash P50,000 Cash P50,000
To record purchases.
Cash 48,750 Cash 48,750
Sales 48,750 Sales 48,750
To record sales.
Cost of sales 32,750
Merchandise Inventory 32,750
To record cost of sales No entry to record cost of sales
Make a count to confirm the *End of the month/year
The inventory balance in the Merchandise Inventory 17,500
Ledger. Income summary 17,500
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