chapter 8 perpetual inventory system clc
TRANSCRIPT
Principle of Accounting
Chapter 8The Perpetual Inventory System
BA. in International BusinessForeign Trade University
Outline
What is inventory?The physical stocktakePerpetual inventory systemThe stock control accountDouble-entry under the perpetual
methodThe cost price of salesFIFO stock valuation
Outline (Cont’d)
The role of stock cardsStock cards and the general
ledgerStock losses and stock gainsRecording stock losses and gainsFrom stock cards to journals
What is inventory?Inventory: The goods that a trading firm
buys and sells.A trading firm buys its inventory and sells
it at a higher price in order to earn revenue.
Exclude from inventory: non-current assets.
The physical stocktakePerform at least once every
reporting period. To determine the actual amount of
inventory on hand at a given date. The value of inventory, as
determined by the physical stocktake, is included in the balance sheet as a current asset.
The physical stocktake (Cont’d)Two processes of a physical stocktake:1. Count the number of units of each type
of inventory. 2. Determine the cost price of each of
these units to calculate the total value of stock on hand.
Stock sheets are used to record the details of a physical stocktake.
Stock sheet
Stock item Quantity Cost Value
AB cricket bats 50 40 2,000
VCA cricket balls 100 18 1,800
Mitre soccer balls 30 22 660
Kooka hockey sticks 15 16 240
Total stock on hand 4,700
Perpetual inventoryThe inventory account is updated every time stock moves in or out of the business.
Perpetual inventory (Cont’d)Disadvantages:1. Additional record-keeping
Increase workload, increase in staff.
2. Additional costsStaff costs, costs of computer
package to maintain inventory records.
3. The need for a physical stocktake at the end of the reporting period is not eliminated.
Perpetual inventory (Cont’d)Advantages:1. Greater control over stock 2. Slow-moving and fast-moving lines
of inventory can be identified. 3. Reordering of inventory is more
efficient. 4. Interim profit reports can be
prepared without doing a stock take.5. The level of stock losses or gains can
be measured.
The stock control accountThe stock control account is used
to record all movements of inventory. Debit side: records purchases of stock Credit side: records sales of stock
The balance of the stock control a/c represents the total cost of stock on hand at that particular point in time.
The stock control account (Cont’d)
Stock control account
Increases in inventory are caused by:
Decreases in inventory are caused by:
• Purchasing goods
• Stock gains
• Selling goods
• Stock losses
Double-entry under the perpetual method – A summary
Transaction Journal Source documents Double -entry
Bought goods for cash
Cash payments
Cheque (butt) Stock control Dr
Cash at bank Cr
Bought goods on credit
Credit purchases
Invoice (original) Stock control Dr
Creditors Cr
Sold goods for cash
Cash receipts
Receipt (copy) Cash at bank Dr
Sales Cr
Cost of sales Dr
Stock control Cr
Sold goods on credit
Credit sales Invoice (copy) Debtor Dr
Sales Cr
Cost of sales Dr
Stock control Cr
Identifying the cost price of sales
Four methods: Identified cost First-in-first-out (FIFO) Last-in-first-out (LIFO) Weighted average cost
First-in-first-out stock valuation
Assumes that the first inventory purchased is the first inventory sold.
Firms normally try to keep stock moving in line with purchases dates to prevent old items from being shop-soiled, outdated.
FIFO - Example
Purchases Sales
Date Lot No Qty Unit cost
Total Date Qty Unit SP
Jan 1 1 50 6.0 300 Jan 4 40 12.0
6 2 50 6.2 310 9 30 12.5
13 3 50 6.5 325 18 20 12.5
24 4 50 6.6 330 31 50 12.9
Total 200 1,265 140
FIFO – Example (Cont’d)Cost of sales Stock on hand
Quantity Unit cost Value Quantity Unit cost Value
50 6.0 300 10 6.5 65
50 6.2 310 50 6.6 330
40 6.5 260 60 395
140 870
The stock card
A form of subsidiary ledger that is used to record the financial transactions of one particular item of inventory.
Stock card – An exampleStock item: Sony 30cm colour TV Product code: STV84920030
Supplier: Wholesale Electricals Location: West 15
Valuation method: FIFO
Date Reference IN OUT BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
Jul 1 Balance 5 180 900
2 Inv.92843 10 190 1900 5 180
10 190 2,800
3 Rec.8743 2 180 360 3 180
10 190 2,440
4 Inv.1001 3 180 540
2 190 380 8 190 1,520
5 Rec. 8748 3 190 570 5 190 950
6 Inv.92877 10 190 1900 15 190 2,850
Stock cards and the general ledger
General ledger Subsidiary ledger
Stock control account Stock cards
A summary of inventory Many individual records
Total of journals are posted periodically
Not part of double-entry
No individual details of stock items
Updated continuously throughout the period
Schedule of stock cards
Inventory description Product code Qty Cost Value
Sony 30cm TV STV84920030 15 190 2,850
Sony 45cm TV STV84020219 10 270 2,700
Kembrook VCR KM843437890 12 250 3,000
Kembrook CD player KM843929232 20 150 3,000
Balance of stock control ledger account 11,550
Stock losses and stock gains
A stock loss Balance per physical stocktake < Balance in the stock cards.
A stock gainBalance per physical stocktake > Balance in the stock cards.
Reasons for stock losses
Undersupply by suppliersOversupply to customersTheftRecording errors in the stock cardsDouble invoicing by supplierStocktaking errors
Reasons for stock gains
Oversupply by suppliersUndersupply to customersRecording errors in the stock
cards.Stocktaking errors.
Recording stock losses
Stock item: Sony 30cm colour TV Product code: STV84920030
Supplier: Wholesale Electricals Valuation method: FIFO
Date Reference IN OUT BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
Jun 1 Balance 10 1500 15000
4 Inv.645 2 1500 3000 8 1500 12000
9 Inv.646 3 1500 4500 5 1500 7500
15 Inv.13212 12 1600 19200 5 1500
12 1600 26700
25 Inv.672 1 1500 1500 4 1500
12 1600 25200
30 Stock loss 1 1500 1500 3 1500
12 1600 23700
Recording stock losses
General journal
Date Accounts Debit Credit
Jun 30 Stock loss 1,500
Stock control 1,500
Adjusting entry to decrease stock control to value of physical stocktake
Stock control account
Stock loss account
Jun 30 Balance 40,000 Jun 30 Stock loss 1,500
Jun 30 Stock control 1,500
Recording stock gains
Stock item: Classic Coffee Machine Product code: CCM4300
Supplier: Gilly Buyatt Valuation method: FIFO
Date Ref IN OUT BALANCE
Qty Cost Value Qty Cost Value Qty Cost Value
May 27 Inv.43255 5 40 200 25 40
28 42 2,176
28 2 40 80 23 40
28 42 2,096
30 4 40 160 19 40
28 42 1,936
31 Stock gain 2 42 84 19 40
30 42 2,020
Recording stock gainsGeneral journal
Date Accounts Debit Credit
Jun 30 Stock control 84
Stock gain 84
Adjusting entry to increase stock control to value of physical stocktake
Stock control account
Stock gain account
May 31 Balance 25,000
May 31 Stock gain 84
May 31 Stock control 84
Practice questions
Exercise 8.1Exercise 8.2Exercise 8.3Exercise 8.10
Homework
Exercise 8.11