Periodic Inventory System – is used by business that sell high in volume and low-priced items

such as grocery items, apparels, clothing, medicines, and many more. However, businesses of
this type who are using computerized system use perpetual though they sell high in volume and
low-priced items. Under this system, no entries are made to the inventory account as the
merchandise is bought and sold. Instead, a separate set of accounts like purchases, purchase
discounts, purchase returns and allowances and freight in, is used to accumulate information on
the net cost of purchases. At the end of the period a physical count is made to determine the
merchandise inventory.
Perpetual Inventory System – is used by businesses that sell low-volume but high-priced goods
such as motor vehicle, jewelry, appliances, computers, furniture and other related goods.
However, with the advent of technology businesses who are using computerized system use
perpetual inventory system even if they sell high volume, low-priced items. Such as supermarkets
and department stores using point- of-sale scanners.
Under this system, the inventory is updated every time there is a sale and purchase of goods. At
the time of sale, the cost is computed and recorded by a debit to cost of sales account and a credit
to the inventory account. Journal entries to recognize the inventory and the cost of sales
accounts are made throughout the accounting period. At the end of the period a physical count
of merchandise inventory is made to reconcile the actual count with what is in the record.

Sales Discount and Sales Returns and Allowance – these are contra income accounts that are
deducted from gross sales to determine the net sales.

Purchase Discounts and Purchase Returns and Allowance – these are contra cost accounts that
are deducted from the gross purchases to determine the net purchases.