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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 basis, at the 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 "Purchases" account.

   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 transaction.


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)

  
Ending inventory 
      = Beginning inventory + Purchases during the period - Cost of goods sold
      = $0 + $30,000 - $6,000 = $24,000

  Cost of goods sold 
      = Beginning inventory + Purchases during the period - Ending inventory
      = $0 + $30,000 - $24,000 = $6,000

Example 2 (Company B)


   On June 5, 2016: Purchased 600 units of merchandise at $35 per unit.

Under Perpetual inventory system
6/5/2016

Debit

Credit

Merchandise Inventory

21,000

Accounts payable

21,000

Under Periodic inventory system
6/5/2016

Debit

Credit

Purchases

21,000

Accounts payable

21,000

   Under periodic inventory system, all purchases during the accounting period are recorded in the "Purchases" account.


   On June 16, 2016: Sold 400 units of merchandise at $55 per unit on credit.

Under Perpetual inventory system
6/16/2016

Debit

Credit

Accounts Receivable

22,000

Sales

22,000

6/16/2016

Debit

Credit

Cost of goods sold

14,000

Merchandise inventory

14,000

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

Under Periodic inventory system
6/16/2016

Debit

Credit

Accounts Receivable

22,000

Sales

22,000

   Under periodic inventory system, the following journal entry is recorded at the end of   accounting period.
6/30/2016

Debit

Credit

Merchandise Inventory

7,000

Purchases

7,000

   Quantity of merchandise inventory 
   = 600 units purchased - 400 units sold = 200 units left

   Cost of merchandise inventory
   = 200 units x $35 per unit cost = $7,000

6/30/2016

Debit

Credit

Cost of goods sold

14,000

Purchases

14,000

Cost of goods sold
   = Total purchases - Ending balance of merchandise inventory
   = 600 units x $35 per unit cost - 200 units x$35 per unit cost
   = $21,000 - $7,000 = $14,000


Ending Inventory and Cost of goods sold (Company B)

   Ending inventory 
      = Beginning inventory + Purchases during the period - Cost of goods sold
      = $0 + $21,000 - $14,000 = $7,000

  Cost of goods sold 
      = Beginning inventory + Purchases during the period - Ending inventory
      = $0 + $21,000 - $7,000 = $14,000




Review of Accounting Topics




Principles of Accounting:  

This section provides study guides for students in the principles of accounting courses or introduction to financial accounting courses. 

  
  
  




50 Questions on
   Accounting Journal Entries
   2012 Edition for iPhone and iPad
Create your own eBooks
   from iPhone and iPad
   (for iBooks and Kindle)


Accounting for General Users:  
 
A guide to accounting for users who are interested in understanding accounting reports.  This section explains what users need to know to understand and analyze accounting information provided in the financial statements.  No prerequisite is required to read this section.  

  
  

    Accounting is an information system.

    Users of accounting information

    Financial accounting for external users

    Managerial accounting for internal users

    Statement of Cash Flows provides information about the cash flow of a company.

    Cash flow from operating activities

    Cash flow from investing activities

    Cash flow from financing activities



Intermediate Accounting:  

This section provides study guides for students in the intermediate accounting courses.  Following topics are discussed in this section.

  
  
 

    Depreciation Methods

    Straight Line Depreciation

    Declining Balance Method

    Sum-of-the-years-digits Method

    Accounting for Bonds Payable

    Price of bonds payable

    Discount on bonds payable

    Premium on bonds payable

    Amortization of discount and premium

    Early extinguishment of debts


Advanced Accounting:  

This section provides study guides for students in the advanced accounting courses.  Following topics are discussed in this section. 

  
  


U.S. GAAP by Codification Topic
  
 105  GAAP Hierarchy 
 105  GAAP History 

 205  Presentation of Financial Statements 
 205-20 Discontinued Operations 
 210  Balance Sheet 
 210-20 Offsetting 
 220  Comprehensive Income 
 225  Income Statement 
 225-20 Extraordinary and Unusual Items 
 230  Statement of Cash Flows 
 250  Accounting Changes and Error Corrections 
 260  Earnings per Share 
 270  Interim Reporting
 
 310  Impairment of a Loan
 320  Investment Securities 
 320  Other-Than-Temporary Impairments, FSP FAS 115-2 
 320-10-05 Overview of Investments in Other Entities 
 320-10-35 Reclassification of Investments in Securities
 323-10 Equity Method Investments
 323-30 Investments in Partnerships and Joint Ventures 
 325-20 Cost Method Investments 
 330  Inventory

 340-20 Capitalized Advertising Costs 
 350-20 Goodwill 
 350-30 Intangibles Other than Goodwill 
 350-40 Internal-Use Software 
 350-50 Website Development Costs 
 360  Property, Plant and Equipment
 360-20 Real Estate Sales 
 
 410  Asset Retirement and Environmental Obligations 
 420  Exit or Disposal Cost Obligations 
 450  Contingencies 
 450-20 Loss Contingencies 
 450-30 Gain Contingencies
 480  Redeemable Financial Instruments 

 505-20 Stock Dividends, Stock Splits 
 505-30 Treasury Stock 

 605  SEC Staff Accounting Bulletin, Topic 13 
 605-25 Revenue Recognition - Multiple Element Arrangements 
 
 715-30 Defined Benefit Plans - Pension
 718  Share-Based Payment 
 730  Research and Development 
 730-20 Research and Development Arrangements 

 805  Business Combinations  
 810  Consolidation 
 810  Noncontrolling Interests 
 810  Consolidation of Variable Interest Entities, SFAS 167 
 
 815  Derivatives and Hedging Overview 

 820  Fair Value Measurements  
 820  Fair value when the markets are not active, FSP FAS 157-4
 825  Fair Value Option 

 830  Foreign Currency Matters 
 830-20 Foreign Currency Transactions 
 830-30 Translation of Financial Statements 
 835  Interest 
 835-20 Capitalization of Interest 
 835-30 Imputation of Interest 

 840  Leases 
 840-20 Operating Leases 
 840-30 Capital Leases 
 840-40 Sale-Leaseback Transactions
 845  Nonmonetary Transactions 

 855  Subsequent Events 
 860-20 Sale of Financial Assets, SFAS 166 
 860-50 Servicing Assets and Liabilities, SFAS 156 

 985-20 Costs of software to be sold  
 
International Financial Reporting Standards (IFRS)







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