Two alternative inventory accounting systems can be used to record information about cost of goods sold and cost of
inventory available for sale:
1. Periodic Inventory System
2. Perpetual Inventory System
Periodic Inventory System Perpetual Inventory System
Cost of Determined only at the end of an accounting Maintains detailed records of the cost of each
Goods Sold period inventory item and continuously show the
inventory that should be on hand
Example Companies selling standardized and Companies that sell high-unit value items, e.g.,
Entities homogenous goods in large batches automobiles, furniture, appliances, and
companies that employ computerized accounting
systems
Perpetual Inventory System
Under the perpetual inventory system, records are kept of the quantity and cost of each item as it is bought, held in
inventory, and sold. Because of the detailed information available under this system, management is able to:
• Respond to inquiries of salespersons and customers about merchandise availability.
• Maintain optimum inventory levels.
• Avoid running out of stock.
Under the perpetual system:
• The cost of each item is debited to the Merchandise Inventory Account upon purchase.
• At the time of sale, the cost of each item is transferred from the Merchandise Inventory Account to the Cost of
Goods Sold account (by debiting Cost of Goods Sold and crediting Merchandise Inventory)
Considering this, the CGS account, at all times, equals the cost of merchandise sold during the period, and the
merchandise inventory account, at all times, equals the cost of merchandise on hand.
Note: Since all increases and decreases related to merchandise are recorded directly in the inventory account under
Perpetual Inventory System, accounts for purchases, purchase returns and allowances, purchase discounts, and freight-
in are not used.
Periodic Inventory System
A traditional periodic inventory system operates as follows:
1. When goods for resale are purchased, the account purchases is debited at the amount of acquisition cost.
2. Upon making a sale, income is recognized by crediting sales, based on the selling price of goods.
3. No separate entry is prepared to record the decrease in the inventory balance as a result of sale and inventory
ledger balance need not be updated as the buying and selling transactions occur.
A periodic inventory system requires updating the inventory account only at the end of the period to reflect the quantity
and cost of goods both available and sold.
• It does not require continual updating of the inventory account.
Under the periodic inventory system, the following transactions are separately accounted for:
1. Sales Returns and Allowances
2. Sales Discount
3. Purchase Returns and Allowances
4. Purchase Discount
Perpetual Inventory System Periodic Inventory System
Cost of Determinable every transaction Determinable every end of period
Goods Sold
Determining Can be determined every transaction by checking Can be determined only upon physical count of
CGS the balance of the CGS account inventory
Determining Can be determined every transaction by checking Can be determined only upon physical count of
Ending the balance of the Inventory account inventory
Inventory
Perpetual Inventory System Periodic Inventory System
Purchases Inventory Account Purchases Account
Purchase Returns, Allowances, Inventory Account (or Separate Separate Accounts
and Discounts Accounts)
Freight-in Inventory Account Purchases Account
Sales Sales Account Sales Account
Sales Returns, Allowances, and Sales Account (or separate accounts) Separate Accounts
Discounts
Cost of Goods Sold Cost of Goods Sold Adjusting Entry
Preparing Normal Journal Entries
1. Black Company purchased merchandise worth P100,000, gross of 2% discount, on account.
Perpetual Inventory System Periodic Inventory System
Inventory 98,000 Purchases 100,000
Accounts Payable 98,000 Purchase Discount 2,000
Accounts Payable 98,000
2. Black Company paid shipping fees amounting to P3,000.
Perpetual Inventory System Periodic Inventory System
Inventory 3,000 Purchases 3,000
Cash 3,000 Cash 3,000
3. Black Company returned defective purchases with a total value of P12,000.
Perpetual Inventory System Periodic Inventory System
Accounts Payable 12,000 Accounts Payable 12,000
Inventory 12,000 Purchase Returns 12,000
4. Black Company paid its outstanding account with its supplier.
Perpetual Inventory System Periodic Inventory System
Accounts Payable 86,000 Accounts Payable 86,000
Cash 86,000 Cash 86,000
5. Black Company sold total merchandise costing P56,000 for 30% gross profit on sale. The Company delivered
the goods on the same date and was paid with 60% cash, the rest was made on account.
Perpetual Inventory System Periodic Inventory System
Cash 48,000 Cash 48,000
Accounts Receivable 32,000 Accounts Receivable 32,000
Sales Revenues 80,000 Sales Revenues 80,000
Cost of Goods Sold 56,000
Accounts Payable 56,000
Preparing Adjusting Journal Entries – Periodic Inventory System
1. Removing the beginning inventory figures from the Inventory account.
2. Closing the purchases and the purchase-related accounts.
3. Setting up the ending inventory figure.
ILLUSTRATION: Black Company made an inventory count on 31 December 2022. Unsold goods amounted to
P160,000. The Company’s inventory account has an ending balance of P80,000 from its 2021 Statement of Financial
Position. Total purchase returns during the year amounted to P64,000 while purchase discounts amounted to P46,000.
The Company made a total of P1,280,000 (exclusive of freight-in of P10,000) of purchases in 2022.
Cost of Goods Sold 80,000
Merchandise Inventory 80,000
Cost of Goods Sold 1,180,000
Purchase Returns 64,000
Purchase Discounts 46,000
Purchases 1,290,000
Merchandise Inventory 160,000
Cost of Goods Sold 160,000
Cost of Goods Sold Merchandise Inventory
80,000 160,000 80,000 80,000
1,180,000 160,000
1,100,000 160,000
