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Statistics for
Management
and Economics

Perpetual and Periodic Inventory

Investing pre/post age 45

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Previous lesson: Sales, Cost of Goods Sold, Gross Profit

Next lesson: Accounting for Manufacturing

Inventory records are kept using either one of the following systems:

a. Perpetual Inventory System

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Perpetual means continuous.
This is a system where a business keeps continuous, moment-to-moment records
of the number, value and type of inventories that it has at the business.

A computerized accounting system – where each item of inventory is linked to the

electronic accounting records – creates a perpetual system. Products that have
barcodes are automatically recorded as having been sold at tills in a supermarket
when they are ‘swiped.’ Inventory levels are automatically decreased as soon as
the invoice has been entered and completed at the till.

b. Periodic Inventory System

Investing pre/post age 45

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counts (such as once a month, or at the beginning and end of each year), and does
not have an accurate record of the inventories in between these points – well, this
is a periodic system.

This system does not keep continuous, moment-to-moment records of inventories.

Accurate records are only kept periodically – meaning, at certain points in time – in
this case, when the actual counts are done.

Many small businesses still only have a periodic system of inventory.

Journal Entries During the Year: Periodic

Inventory
Now what do these two systems mean in terms of journal entries? Let’s look at
the periodic inventory system (b) first.
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If we have a periodic inventory

system and purchase more inventories during the year, we record the following:

This isn’t very complicated – we’ve been doing this already in previous lessons.

When we sell these inventories on the periodic system we record:

Again, we’ve gone through this journal entry before, so nothing new.

Journal Entries During the Year: Perpetual

Inventory
Now, with the perpetual inventory system it’s a bit different.

When we purchase more inventories during the year, we say:

Why do we use the “inventories" (asset) account here and not “purchases"
(expense)? The answer is that where we are keeping perpetual records of
inventory, we can continuously adjust the inventories account when we get more
inventories. Where we are not keeping perpetual records of our inventory, it is
inappropriate to adjust the inventories account (there are no continuous, accurate
records of our inventory levels), so we use the “purchases" account. When we next
do a physical inventory count (and thus have an accurate record of inventories
once again) we can then adjust our “inventories" account to the newly-counted
level. We’ll look at how this adjustment is done pretty soon.

FYI, in the examples in previous lessons, we used the periodic inventory system
and so debited the “purchases" account when buying inventories (not the
“inventory" account).

When we use a perpetual inventory system and sell inventories we record:

Thus we are left with a sales figure of $1,500 that can be matched against an
expense – cost of goods sold – of $1,000, to give us $500 gross profit. We also
have $500 in our bank account ($1,500 – $1,000). The balance of inventories is $0
($1,000 – $1,000).

End of Year Adjustments:

Periodic Inventory
Let’s look at the periodic inventory system again. There was no entry regarding
cost of goods sold using this system. So how does cost of goods sold fit in? At the
end of the period (when we do a physical inventory count) we adjust our
“inventory" and “cost of goods sold" accounts again.

Let’s look at our example of the periodic system again to see how this works. We’ll
use the same figures above, but now let’s also say that the business had $200
worth of inventories at the beginning of the year (opening inventories). At the
beginning of the year our inventories T-account would have looked as follows:

At the end of the period we count $100 worth of inventory.

At the end of the period we make the following adjustments:

The above closing entries (entries at the end of the year) are in line with the
formula for the calculation of cost of goods sold:

Our inventories account would look like this at the end of the year:

Inventories (already at $200) are adjusted to the counted figure of $100 only at
the end of the year (when counted). This is done in two steps (cancel the $200 and
then add the $100), but can be done in one step.
The contra account is always “cost of goods sold." One way of looking at why we do
this is that the difference between the $200 (opening inventories) and $100
(closing inventories) must have been sold, and the value of these goods that were
sold ($100) is thus added to the “cost of goods sold" expense.

The “cost of goods sold" account would look like this at the end of the year:

End of Year Adjustments:

Perpetual Inventory
Let’s look at what we did with the perpetual system again:

When we purchased more inventories during the year, we said:

When we sold these inventories we recorded:

Cost of goods sold and inventories are thus adjusted continuously throughout the
year – after each and every sale. Additionally, unlike the periodic system, at the
end of the year cost of goods sold and inventories do not have to be adjusted at all.
This is because the adjustments have already been done throughout the year.

And that represents the big difference between perpetual and periodic systems
– continuous adjustment or adjustment only at certain periods.
Return from Perpetual and Periodic Inventory to Inventory

Return from Perpetual and Periodic Inventory to Home Page

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Previous lesson: Sales, Cost of Goods Sold, Gross Profit

Next lesson: Accounting for Manufacturing

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Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to
this page... (if there is no published solution to the question/exercise, then try and
solve it yourself)

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Which accounting inventory system is best for accounting?

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Recording of Inventories Donated

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Entry for Purchase Returns

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Inventory Held For More Than One Year?

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Why not Debit Inventories in the

Periodic Inventory System?
Q: Why do we not debit inventories in the periodic inventory system? A: Very good
question. The answer to this is fully explained in the lesson on …
 Comments
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Irin Sandiya ·
Phoenix, Arizona

good informations
Like · Reply · 1 · Feb 9, 2012 9:02am

Lucky Thakur ·
CCS University, Meerut

I SATISFIED THIS INFORMATION (09718302525).

Like · Reply · 1 · Feb 11, 2012 1:08am

Marilyn Birdene
It was very clear and to the point.
Like · Reply · 1 · Feb 19, 2012 11:15am

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