The Perpetual System

For businesses selling high-priced items, the perpetual system is a more appropriate system
to use. Car dealers and expensive watch stores approximately make small number of sales
daily. These sales are few and since the amount per item is material, the cost of each item
sold can be recorded as the cost of goods sold per sales transaction. Thus, the running
balance of inventory on hand and the cost of sales are shown continuously. At the end of the
accounting period, the balance of the ending inventory should be the same with the actual
physical count unless there is theft, obsolescence, or spoilage of goods.
Note: Whatever inventory system a company chooses to use, either the periodic system or
the perpetual system, it should yield the same ending inventory and net income for the
company.

LESSON 7-2 THE PERIODIC SYSTEM

Lesson Objectives
• analyze the different merchandising transactions from both the seller's and the buyer's
points of view
• journalize the transactions on the seller's and the buyer's books under the periodic system
of recording inventory

Discount
A discount is a reduction from a certain price or amount. There are two kinds of discount in
accounting for merchandising transactions, the trade discount and the cash discount.

1. Trade Discount - a deduction from the list price or catalogue price granted to customers to
encourage purchase of goods or merchandise in big quantities or volume.
This is not recorded or shown in the buyer's or seller's books.

Illustrative Problem
a. Spitz Co. bought merchandise for cash with a list price of P10,000 less 10% trade
discount.
List Price
Less: 10% Trade Discount
P10,000 × 0.1
Purchase Price

P10,000
1.000
9.000

Journal entry on the books of Spitz Co.

Purchases
Cash
Purchased merchandise for cash
9,000
9,000
Note: The trade discount was not shown in the books and the purchase price recorded in the