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Perpetual and Periodic Inventory Systems

Perpetual Inventory System

Perpetual inventory system updates inventory accounts after each purchase or sale.

Inventory subsidiary ledger is updated after each transaction.


Inventory quantities are updated continuously.

Periodic Inventory System

Periodic inventory system records inventory purchase or sale in "Purchases" account.

"Purchases" account is updated continuously, however, "Inventory" account is updated on a periodic ba


end of each accounting period (e.g., monthly, quarterly)

Inventory subsidiary ledger is not updated after each purchase or sale of inventory.
Inventory quantities are not updated continuously.
Inventory quantities are updated on a periodic basis.

Example 1 (Company A)

On May 1, 2016: Purchased 1,000 units of merchandise at $30 per unit.

Under Perpetual inventory system

5/1/2016 Debit Credit

Merchandise Inventory 30,000

Accounts payable 30,000

Under Periodic inventory system

5/1/2016 Debit Credit

Purchases 30,000

Accounts payable 30,000

Under periodic inventory system, all purchases during the accounting period are recorded in the "Purchas

On May 6, 2016: Sold 200 units of merchandise at $50 per unit on credit.

Under Perpetual inventory system

5/1/2016 Debit Credit


Accounts Receivable 10,000

Sales 10,000

5/1/2016 Debit Credit

Cost of goods sold 6,000

Merchandise inventory 6,000

Under perpetual inventory system, changes in merchandise inventory account are recorded after each tra

Under Periodic inventory system

5/1/2016 Debit Credit

Accounts Receivable 10,000

Sales 10,000

Under periodic inventory system, the following journal entry is recorded at the end of accounting period

5/31/2016 Debit Credit

Merchandise Inventory 24,000

Purchases 24,000

Quantity of merchandise inventory


= 1,000 units purchased - 200 units sold = 800 units left

Cost of merchandise inventory


= 800 units x $30 per unit cost = $24,000

5/31/2016 Debit Credit

Cost of goods sold 6,000

Purchases 6,000

Cost of goods sold


= Total purchases - Ending balance of merchandise inventory
= 1,000 units x $30 per unit cost - 800 units x$30 per unit cost
= $30,000 - $24,000 = $6,000

Ending Inventory and Cost of goods sold (Company A)


LO6 – Explain the closing process for a merchandizer.

The process of recording closing entries for service companies was illustrated in Chapter 3. The
closing procedure for merchandizing companies is the same as for service companies—all
income statement accounts are transferred to the Income Summary account, the Income
Summary is closed to Retained Earnings, and Dividends are closed to Retained Earnings.

When preparing closing entries for a merchandizer, the income statement accounts unique for
merchandizers need to be considered—Sales, Sales Discounts, Sales Returns and Allowances,
and Cost of Goods Sold. Sales is a revenue account so has a normal credit balance. To close
Sales, it must be debited with a corresponding credit to the income summary. Sales Discounts
and Sales Returns and Allowances are both contra revenue accounts so each has a normal
debit balance. Cost of Goods Sold has a normal debit balance because it is an expense. To close
these debit balance accounts, a credit is required with a corresponding debit to the income
summary.

All accounts listed in the income statement columns are transferred to the income summary
account, and then the income summary is closed to retained earnings. The same three-step
process is used, as shown in chapter 3, as applied to the financial information of Excel Cars
Corporation for the year ended December 31, 2016:

Entry 1

All income statement accounts with credit balances are debited to bring them to zero. Their
balances are transferred to the income summary account.

Entry 2

All income statement accounts with debit balances are credited to bring them to zero. Their
balances are transferred to the income summary account.
Entry 3

The Income Summary account is closed to the Retained Earnings account. The effect is to
transfer temporary (income statement) account balances in the income summary totalling
$4,034 to the permanent (balance sheet) account, Retained Earnings.

Closing Entries – Periodic Inventory System

17 August, 2015 - 17:46

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The process of closing the general ledger temporary accounts to retained earnings at the end
of an accounting year is the same under the perpetual or periodic system, with one exception.
Under the periodic system, an entry must be made in the Merchandize Inventory account to
adjust this balance to the amount of inventory counted and valued at year-end. Otherwise, the
steps are the same:

Entry 1

All income statement accounts with credit balances are debited to bring them to zero. Their
balances are transferred to the income summary account. At the same time, the ending
inventory balance($2,000 in this case) is debited to the Merchandize Inventory account.
Entry 2

All income statement accounts with debit balances are credited to bring them to zero. Their
balances are transferred to the Income Summary account. At the same time, the opening
inventory balance(zero in this case) is credited to the Merchandize Inventory account:

The combined effect of entries 1 and 2 on the Merchandize Inventory account is to adjust it to
the actual ending balance at December 31 of $2,000. At the end of this process, the account will
show:
Entry 3

The income summary account is closed to the Retained Earnings account. The effect is to
transfer temporary account balances in the income summary totalling $2,034 to the permanent
general ledger account, Retained Earnings.