The Perpetual Inventory System

Perpetual Inventory
Reminder: The perpetual inventory system keeps track of inventory and cost of goods sold on 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

Perpetual Inventory
The Perpetual inventory system uses two accounts that we have not studied in detail 1. Merchandise Inventory 2. Cost of Goods Sold

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

Cost of Goods Sold

Not to be confused with the figure we calculate on the income statement in the Periodic Income Statement
....yes, they are different more tomorrow

One of the reasons I say the perpetual system is easier 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

Perpetual Inventory
We are going to go through the same transactions we have discussed this week with the periodic inventory system
1. 2. 3. 4. Purchase of Goods Selling of Goods Return of Goods Shipping of Goods

Plus!!!
5. Inventory Shortage

The Perpetual Inventory Method

Cash Purchase of Inventory Jun. 8 Purchases sports equipment from Schwinn, $500, Cheque 86
Date Particulars
P.R.

Notice, we now use the Merch. Inventory Account instead of the Purchases Account

Debit

Credit

Jun
1

Merchandise Inventory Cash

500
1

500
2

Purchased Sports Equipment, Cheque 86

The Perpetual Inventory Method

Credit Purchase of Merchandise Jun. 9 Purchases sports equipment from Spalding, invoice 2974, $200 on account
Date Particulars
P.R.

Debit

Credit

Jun
1

9 Merchandise Inventory A/P Spalding Ltd.

200
1

200
2

Purchases Equipment, Invoice 2974

Selling of Goods
Reminder: With the Periodic System there was 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 specific inventory

2 different transactions for every sale!!

The Perpetual Inventory Method

Date Particulars
P.R.

Debit

Credit

Jan 10
1 2

Cash
HST Payable Sales Revenue

1130
1

130 1000

Cost of Goods Sold Merchandise Inventory

700 700

This is to keep our inventory up-to-date with every sale, sales discount, or sales return

Return of Goods
From the merchandising business perspective
When returning goods to the supplier all we need to do is show the affect on our inventory When customers return goods to us we add the goods back into our inventory
Does this make sense?

The Perpetual Inventory Method

Goods returned for Credit (Purchase Returns & Allowances) Jun. 11 Received Credit Invoice 981 for $200 from Spalding Ltd. for returned tennis equipment.
Date Particulars
P.R.

Debit

Credit

Jun
1 2

11 A/P Spalding Ltd

200
1

Merchandise Inventory Merchandise return, credit invoice 981

200

The Perpetual Inventory Method

Goods returned to our business (Sales Returns & Allowances) Jun. 11 Sent Credit Invoice 681 for $40 to T. Ranasorusrex for returned tennis equipment.
Date Particulars
P.R.

Debit

Credit

Jun
1 2

11 Merchandise Inventory

200
1

A/R T. Ranasorusrex Merchandise return, credit invoice 681

200

Freight
When shipping goods the accountant has to add the cost of the shipping to the overall cost of the inventory
Perpetual added into the COGS section on the I/S Period will ultimately make its way into our COGS figure, but to do so, we add it to the cost of our merchandise inventory

The Perpetual Inventory Method

Freight In Freight In is part of the Cost Of Goods Sold Account, so we now use Merchandise Inventory instead
Date Particulars
P.R.

Debit

Credit

Jun 16
1

Merchandise Inventory Cash

200
1

200
2

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?

The Perpetual Inventory Method

Inventory Shortage It is discovered that the storage room is short $75 worth of lacrosse equipment
Date Particulars
P.R.

Debit

Credit

Jun 16
1

Inventory Shortage Merchandise Inventory

75
1

75
2

Homework
Perpetual Worksheet Complete all transactions for tomorrow