5a. the perpetual inventory system

8/13/2019 5a. the Perpetual Inventory System

1/18

The Perpetual Inventory System


2/18

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


3/18

Perpetual Inventory

The Perpetual inventory system uses two

accounts that we have not studied in detail

1. Merchandise Inventory

2. Cost of Goods Sold


4/18

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


5/18

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


6/18

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


7/18

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


8/18


Credit Purchase of Merchandise

Jun. 9Purchases sports equipment from Spalding,

invoice 2974, $200 on account


1 1

2 2

3 3


A/P Spalding Ltd. 200

Purchases Equipment, Invoice

2974


9/18

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!!


10/18



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


11/18

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?


12/18


Goods returned for Credit (Purchase Returns &Allowances)

Jun. 11Received Credit Invoice 981 for $200 from

Spalding Ltd. for returned tennis equipment.


1 1

2 2

3 3

Jun 11 A/P Spalding Ltd 200


Merchandise return, credit

invoice 981


13/18


Goods returned to our business (Sales Returns &Allowances)

Jun. 11Sent Credit Invoice 681 for $40 to T.

Ranasorusrex for returned tennis equipment.


1 1

2 2

3 3


A/R T. Ranasorusrex 200

Merchandise return, credit

invoice 681


14/18

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


15/18


Freight In

Freight In is part of the Cost Of Goods Sold Account, sowe now use Merchandise Inventory instead


1 1

2 2

3 3


Cash 200


16/18

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?


17/18


Inventory Shortage

It is discovered that the storage room is short $75worth of lacrosse equipment


1 1

2 2

3 3

Jun 16 Inventory Shortage 75



18/18

Homework

Perpetual Worksheet

Complete all transactions for tomorrow

5a. the perpetual inventory system

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