Slide 3

In this video we will cover the last two learning outcomes being differentiating between
perpetual vs periodic inventory and understanding proper internal controls in the inventory
process.
Slide 21
There are two types of inventory record keeping system which is perpetual inventory system
and periodic inventory system.
In perpetual inventory system, merchandise inventory and cost of goods sold are updated
continuously on each sale and purchase transaction. Some other transactions may also require
an update to inventory account for example, sale/purchase return, purchase discounts etc.
Purchases are directly debited to inventory account whereas for each sale two journal entries
are made: one to record sale value of inventory and other to record cost of goods sold.
Purchases account is not used in perpetual inventory system.
Slide 22
Whereas in periodic inventory system, merchandise inventory and cost of goods sold are not updated
continuously. Instead purchases are recorded in Purchases account and each sale transaction is
recorded via a single journal entry. Thus cost of goods sold account does not exist during the accounting
period. It is determined at the end of accounting period via a closing entry.

Slide 23
Lets look at some basic differences between perpetual and periodic inventory system. First
Inventory Account and Cost of Goods Sold Account are used in both systems but they are updated
continuously during the period in perpetual inventory system whereas in periodic inventory system they
are updated only at the end of the period.

Second Purchases Account and Purchase Returns and Allowances Account are only used in periodic
inventory system and are updated continuously. In perpetual inventory system purchases are directly
debited to inventory account and purchase returns are directly credited to inventory account

Third, Sale Transaction is recorded via two journal entries in perpetual system. One of them
records the sale value of inventory whereas the other records cost of goods sold. In periodic
inventory system, only one entry is made
And fourth Closing Entries are only required in periodic inventory system to update inventory and cost
of goods sold. Perpetual inventory system does not require closing entries for inventory account.

Slide 24
When you purchase inventory in a perpetual system you will debit inventory and credit
accounts payable. When you are selling inventory you will debit accounts receivable and credit
sales. And the second entry will be the adjustment for inventory that has gone out so debit cost
of goods sold and credit inventory, In the perpetual system the adjustment entry is only
required if the records do not match the stock take amount.
Slide 25
As for periodic inventory system, when purchasing we will debit purchases and credit accounts
payable and when you are selling you will debit accounts receivable and credit sales. And for
the end of month adjustments you will debit inventory, credit cost of goods sold, and credit
purchases.
Slide 26
Lets look at some common inventory processes. These include inventory policies and
procedures, inventory counting, inventory costing, inventory storage, inventory data relating to
purchases and sales, and updating inventory related transactions.
Slide 27
The accounting system uses inventory documents to record, summarize, and report results of
the inventory transactions.
The inventory processes relating to sales and purchases are the policies and procedures that
staffs follow in completing the inventory records when there are purchase and sale of goods,
capturing customer and supplier data and the purchase and sale quantities, and then routing
the sales and purchases documents to the respective departments within the organization for
updating inventory movements
Slide 28
The inventory process diagram clearly shows the flow of inventory in different departments.
Slide 29
Merchandising and manufacturing companies keep an inventory of goods held for sale.
Management is responsible for determining and maintaining the proper level of goods in
inventory. If inventory contains too few items, sales may be missed. If inventory contains too
many items, the business pays unnecessary amounts to warehouse, secure, and insure the
items, and the company's cash flow becomes one sided‐cash flows out to purchase inventory
but cash does not flow in from sales
Companies take physical inventories to count how many (or measure how much) of each item
the company owns. Inventory is easier to count when sales and deliveries are not occurring, so
many companies take inventory when the business is closed.
Taking a physical inventory involves internal control principles. Examples of these internal
control principles include the following:
Segregation of duties. Specific items should be counted by employees who do not have custody
of the items.
Slide 30
Other controls include Proper authorization. Here managers are responsible for assigning each
employee to a specific set of inventory tasks. In addition, employees who help take inventory
are responsible for verifying the contents of boxes, barrels, and other containers.
We also need to keep adequate documents and records. Pre-numbered count sheets are
provided to all employees involved in taking inventory. These count sheets provide evidence to
support reported inventory levels and, when signed, show exactly who is responsible for the
information they include.
Next is Physical controls. Access to inventory should be limited until the physical inventory is
completed. If the company plans to ship inventory items during a physical inventory, these
items should be placed in a separate area. Similarly, if the company receives inventory items
during a physical inventory, these items should be kept in a designated area and counted
separately.
Then, Independent checks on performance. After the employees finish counting, a supervisor
should verify that all items have been counted and that none have been counted twice. Some
companies use a second counter to check the first counter's results.
Slide 31
Lets look at what we mean by consigned merchandise. Consigned merchandise is merchandise
sold on behalf of another company or individual, who retains title to it. Although the seller
(consignee) of the merchandise displays the items, only the owner (consignor) includes the
items in inventory. Therefore, companies that sell goods on consignment must be careful to
exclude from inventory those items provided by consignors.
Next is Goods in transit. Goods in transit must be included in either the seller's or the buyer's
inventory. When merchandise is shipped FOB (free on board) shipping point, the purchaser
pays the shipping fees and gains title to the merchandise once it is shipped. Therefore, the
merchandise must be included in the purchaser's inventory even if the purchaser has not yet
received it.
When merchandise is shipped FOB (free on board) destination, the seller pays the shipping
fees and maintains title until the merchandise reaches the purchaser's place of business.
Such merchandise must be included in the seller's inventory until the purchaser receives it. In
addition to counting merchandise on hand, therefore, someone must examine the freight terms
and shipping and receiving documents on purchases and sales just before and just after the
count takes place to establish a more complete and accurate inventory count.
Slide 32
Inventory processes can also engage RFID. Radio frequency (RF) technology is commonly used
to transmit and receive information without wires. A wide variety of electronic devices such as
television, radio, and wireless telephone use radio frequency technology to transmit or receive
information.
Slide 33
The advantage of RFID over barcodes technology is mostly it can track people items, and
equipment’s on a real time basis.
Slide 34
Businesses operate efficiently when IT systems are involved to manage the inventory processes.
With the introduction of computer based inventory systems, more and more businesses have found it
feasible to use a perpetual inventory system for planning and controlling their inventory.

Sophisticated, highly integrated IT systems capture, record, and process inventory related
transactions. Most retail businesses now use optical-scan cash registers to read product bar
codes. Such systems include: point of sales (POS) systems as discussed in the previous unit.
Slide 35
Point of Sale systems features include touch screen menus, bar code scanning of inventory
items, real-time access and processing of inventory related transactions, real-time update of
purchases, sales, and inventory records, immediate summaries, reports and analysis and
integration of inventory records with the company’s general ledger system
They not only record the sale price of the item but also enter the item sold for inventory
purposes. The cash registers are, in effect, data input computer terminals entering transactions
into the accounting and inventory records at the point of sale.
Computer packages such as MYOB and QuickBooks also automatically track goods and sales tax
(or value added tax) collections and outlays
Slide 36
MYOB can help you to manage inventory by keeping a track of your items, what amount of
goods go out and what amount remains with the correct quantity and price. AIS such as MYOB
helps you to keep better track of the value of the ending inventory in a business.
Slide 37
In MYOB the Inventory command centre controls the way MYOB manages goods and services.
You can create items (i.e. things you buy and sell), and set up automatic triggers to remind you
when your stock levels fall below pre-determined levels which automatically prepare purchase
orders to replenish stock.
You can create simple inventory systems which track only the quantity of goods and services
you have sold, all the way to the most sophisticated system which tracks your raw materials,
direct labor and other manufacturing inputs into production and then follows the finished
goods to market
Slide 38
Important thing to note is in MYOB you can record inventory in both by perpetual or period
methods.
A Perpetual inventory system is used whenever an item is marked I Inventory This Item. This
indicates to MYOB that it should track all monetary and physical movements of the item
A periodical inventory system is used whenever an item is marked with I Buy and I Sell only.
Slide 39
You can use the Count Inventory window to make adjustments to item quantities during regular
stock-takes or any time you find discrepancies between the actual quantity of items you have in
stock and your MYOB Accounting records of those quantities.
The count inventory window will speed the process of updating the quantities of items. By
using this window, you can quickly create one inventory adjustment for all the items whose
quantities you need to change
Each inventory adjustment you make must be allocated to a specific account so your accounting
records accurately reflect the reasons why your inventory needed adjusting. For example, many
businesses use one account—often called “Shrinkage/Spoilage”—to track natural loss or theft
of their items
Slide 40
Lets look at some inventory reports in MYOB.
Analyze Inventory report is a summary and detailed versions of the orders and is the ‘order
book’. You can view a list of all your sales orders and purchase orders for all or selected items
Next is Items List (Summary) report. This report shows information about your items, including
their on-hand quantities and total value. The Items List (Summary) report also shows an item’s
current average cost price, which is important to know when making inventory adjustments.
You can use this report to compare your total inventory value to the total of your Inventory
asset accounts
The last one is Pricing report. This report lists your item prices—useful for sending to your
customers