INVENTORY METHOD

 It is an accounting method used to estimate the value of a store’s

merchandise. The retail method provides the ending inventory balance for a
store by measuring the cost of inventory relative to the price of the
merchandise.

*PERIODIC INVENTORY SYSTEM*

-> is a form of inventory valuation where the inventory account is updated at the
end of an accounting period rather than after every sale and purchase.
-> The method allows a business to track its beginning inventory and ending
inventory within an accounting period.
-> uses an occasional physical count to measure the level of inventory and the cost
of goods sold (COGS). No continuous record of inventory.

*PERPETUAL INVENTORY SYSTEM*

-> Every transaction should be record in journal immediately; direct to inventory.
-> Keeps track of inventory balances continuously, with updates made
automatically whenever a product is received or sold.
-> Continuous record of inventory and cost of goods sold (COGS)

ILLUSTRATION: PERPETUAL VS. PERIODIC (JOURNAL ENTRIES)

PERPETUAL SYSTEM PERIODIC SYSTEM

1. You purchased goods worth 100,000 PHP on account.
Inventory 100,000 Purchases 100,000
Accounts Payable 100,000 Accounts Payable 100,000
2. You paid shipping cost of 10,000 PHP on the purchase above.
Inventory 10,000 Freight-in 10,000
Cash 10,000 Cash 10,000
3. You returned damaged goods worth 20,000 PHP to the supplier.
Accounts Payable 20,000 Accounts Payable 20,000
Inventory 20,000 Purchase Returns 20,000
 4. You sold goods costing 50,000 PHP for 200,000 PHP on account(at 75% gross profit)
Accounts Receivable 200,000 Accounts Receivable 200,000
Sales 200,000 Sales 200,000

Cost of Goods Sold 50,000

Inventory 50,000 NO ENTRY
5. A customer returned goods with sale price of 8,000 PHP and cost of 2,000 PHP.
Sales Returns 8,000 Sales Returns 8,000
Accounts Receivable 8,000 Accounts Receivable 8,000

Inventory 2,000
Cost of Goods Sold 2,000 NO ENTRY

PERPETUAL INVENTORY SYSTEM

You Products, Inc.
Income Statement
For Year Ending December 31,2020
Sales 200,000
Less: Sales Discount 0
Less: Sales Returns and Allowances ( 8,000)
Net Sales 192,000
Less: Cost of Goods Sold ( 48,000)
GROSS PROFIT 144,000
Operating Expense:
Selling Expense
Advertising Expense 5,000
Sales Salaries Expense 5,000
Total Selling Expense ( 10,000)
Administrative Expense
Rent Expense – office 8,000
Office Salaries Expense 5,000
Total Administrative Expense ( 13,000)
INCOME FROM OPERATIONS 121,000
Other Revenue (Expense)
Interest Revenue 1500
Interest Expense ( 500)
Total Other Revenue (Expense) 1,000
 NET INCOME 122,000
PERIODIC INVENTORY SYTEM
You Products, Inc.
Income Statement
For Year Ending December 31,2020
Purchases 100,000
Add: Freight-in 10,000
Add: Purchase Discount 0
Less: Purchase Returns and Allowances ( 20,000)
Net Sales 90,000
Less: Cost of Goods Sold ( 48,000)
GROSS PROFIT 42,000
Operating Expense:
Selling Expense
Advertising Expense 5,000
Sales Salaries Expense 5,000
Total Selling Expense ( 10,000)
Administrative Expense
Rent Expense – office 8,000
Office Salaries Expense 5,000
Total Administrative Expense ( 13,000)
INCOME FROM OPERATIONS 19,000
Other Revenue (Expense)
Interest Revenue 1500
Interest Expense ( 500)
Total Other Revenue (Expense) 1,000
NET INCOME 20,000

*FIFO (First In, First Out)*

-> Assumes that any sale of an item is from the oldest batch on hand, and is
relevant when the prices you bought it at fluctuate.
-> This method will give you a very accurate representation of your inventory,
which can be beneficial if you buy batches of the same item at varying prices

Illustration:
The following data pertain to an inventory item:
 UNIT SALES
UNITS TOTAL COST
COST (IN UNITS)
Jan. 1 Beginning Balance 800 200 160,000
Jan. 8 Sale 500
Jan. 18 Purchase 700 210 147,000
Jan. 22 Sale 800
Jan. 31 Purchase 500 220 110,000
The ending inventory is 700 units.

FIFO – PERIODIC
UNITS UNIT COST TOTAL COST
From Jan. 18 Purchase 200 210 42,000
From Jan. 31 Purchase 500 220 110,000
700 152,000

Accordingly, the cost of goods sold is computed as follows:

Inventory – January 1 160,000
Purchases (147,000 + 110,000) 257,000
Goods available for sale 417,000
Inventory – January 31 (152,000)
COST OF GOODS SOLD 265,000

FIFO – PERPETUAL
PURCHASES SALES BALANCE
Unit Unit Units
DATE Units Total Cost Units Total Cost Units Total Cost
Cost Cost Cost
Jan. 1 800 200 160,000
8 500 200 100,000 300 200 60,000
18 700 210 147,000 300 200 60,000
22 300 200 60,000 700 210 147,000
500 210 105,000 200 210 42,000
31 500 220 110,000 200 210 42,000
500 220 110,000

The cost of goods sold is determined from the stock card as follows:
January 8 – Sale 100,000
 22 – Sale 165,000
COST OF GOODS SOLD 265,000
*WEIGHTED AVERAGE* – PERIODIC
-> The cost of the beginning inventory plus the total cost of purchases during the
period is divided by the total units purchased plus those in the beginning inventory
to get a weighted average unit cost.
-> Such weighted average cost is then multiplied by the units on hand to derive the
inventory value.
-> In other words, the average unit cost is computed by dividing the total cost of
goods available for sale by the total number of units available for sale.

Illustration:
UNITS UNIT COST TOTAL COST
Jan. 1 Beginning Balance 800 200 160,000
18 Purchase 700 210 147,000
31 Purchase 500 220 110,000
Total Goods Available for Sale 2,000 417,000

Weighted average unit cost (417,000 / 2,000) 208.50

Inventory Cost (700 x 208.50) 145,950

Accordingly, the cost of goods sold is computed as follows:

Inventory – January 1 160,000

Purchases 257,000
Goods Available for Sale 417,000
Inventory – January 31 (145,950)
COST OF GOODS SOLD 271,050

*WEIGHTED AVERAGE* – PERPETUAL

-> When used in conjunction with the perpetual system, the weighted average
method is popularly knowns as the moving average method.
-> This method requires the keeping of inventory stock card in order to monitor the
“moving” unit cost after every purchase.
 UNITS UNIT COST TOTAL COST
Jan 1 Balance 800 200 160,000
8 Sale (500) 200 (100,000)
Balance 300 200 60,000
18 Purchase 700 210 147,000
Total 1000 207 207,000
22 Sale (800) 207 (165,600)
Balance 200 207 41,400
31 Purchase 500 220 110,000
Total 700 216 151,400

COST OF GOODS SOLD FROM THE STOCK CARD

January 8 – Sale 100,000

22 – Sale 165,600
COST OF GOODS SOLD 265,600