The Perpetual Inventory System

– .. saves in time and effort • Accounting is simpler......in my opinion .Perpetual Inventory • Reminder: The perpetual inventory system keeps track of inventory and cost of goods sold on a continuous basis during the fiscal period – Rather than period • Uses software systems.. bar codes • Costly to set up..

Merchandise Inventory 2. Cost of Goods Sold .Perpetual Inventory • The Perpetual inventory system uses two accounts that we have not studied in detail 1.

is a debit account . appears on the balance sheet – Thus.Merchandise Inventory • The account will keep track of the cost of all merchandise that is currently owned by the business • Is classified as an ASSET – A current asset to be more specific • Why? – Thus.

. they are different – more tomorrow • One of the reasons I say the perpetual system is easier for accountants – No need to calculate Cost of Goods Sold – Kept Track of the entire fiscal period • Is an expense (non operating) – A normal cost of doing business – Appears on the I/S – Has a debit balance .yes...Cost of Goods Sold • Not to be confused with the figure we calculate on the income statement in the Periodic Income Statement – .

Purchase of Goods Selling of Goods Return of Goods Shipping of Goods • Plus!!! 5. 2. Inventory Shortage .Perpetual Inventory • We are going to go through the same transactions we have discussed this week with the periodic inventory system 1. 3. 4.

$500. Inventory Account instead of the Purchases Account Debit Credit Jun 1 8 Merchandise Inventory Cash 500 1 500 2 2 3 Purchased Sports Equipment. Cheque 86 3 . 8 – Purchases sports equipment from Schwinn. we now use the Merch. Cheque 86 Date Particulars P.The Perpetual Inventory Method Cash Purchase of Inventory • Jun.R. Notice.

Debit Credit Jun 1 9 Merchandise Inventory A/P Spalding Ltd.The Perpetual Inventory Method Credit Purchase of Merchandise • Jun. $200 on account Date Particulars P. Invoice 2974 3 . 9 – Purchases sports equipment from Spalding.R. 200 1 200 2 2 3 Purchases Equipment. invoice 2974.

Selling of Goods • Reminder: With the Periodic System there was no change to our journal transaction • The selling of goods gets more complicated with the Perpetual System • The accountant must record – The affect in the inventory account – The amount it cost us to purchase that specific inventory • 2 different transactions for every sale!! .

Debit Credit Jan 10 1 2 Cash HST Payable Sales Revenue 1130 1 130 1000 2 3 3 4 4 5 Cost of Goods Sold Merchandise Inventory 700 700 5 6 6 7 7 8 8 This is to keep our inventory “up-to-date” with every sale.The Perpetual Inventory Method Date Particulars P. sales discount. or sales return .R.

Return of Goods • From the merchandising business’ perspective – When returning goods to the supplier – all we need to do is show the affect on our inventory – When customers return goods to us – we add the goods back into our inventory • Does this make sense? .

credit invoice 981 200 2 3 . 11 – Received Credit Invoice 981 for $200 from Spalding Ltd.The Perpetual Inventory Method Goods returned for Credit (Purchase Returns & Allowances) • Jun. Debit Credit Jun 1 2 11 A/P Spalding Ltd 200 1 3 Merchandise Inventory Merchandise return. for returned tennis equipment.R. Date Particulars P.

11 – Sent Credit Invoice 681 for $40 to T.The Perpetual Inventory Method Goods returned to our business (Sales Returns & Allowances) • Jun. Debit Credit Jun 1 2 11 Merchandise Inventory 200 1 3 A/R T. Ranasorusrex for returned tennis equipment.R. Date Particulars P. Ranasorusrex Merchandise return. credit invoice 681 200 2 3 .

we add it to the cost of our merchandise inventory . but to do so.Freight • When shipping goods – the accountant has to add the cost of the shipping to the overall cost of the inventory – Perpetual – added into the COGS section on the I/S – Period – will ultimately make its way into our COGS figure.

so we now use Merchandise Inventory instead Date Particulars P.R. Debit Credit Jun 16 1 Merchandise Inventory Cash 200 1 200 2 2 3 3 .The Perpetual Inventory Method Freight In • Freight In is part of the Cost Of Goods Sold Account.

but it will occur • What accounts do you think are affected? . we may discover that the amount of inventory is short – For what reasons? • This happens in business – Owners try to minimize their effects and the amount of inventory that goes missing.Inventory Shortage • Unfortunately.

Debit Credit Jun 16 1 Inventory Shortage Merchandise Inventory 75 1 75 2 2 3 3 .R.The Perpetual Inventory Method Inventory Shortage • It is discovered that the storage room is short $75 worth of lacrosse equipment Date Particulars P.

Homework • Perpetual Worksheet • Complete all transactions for tomorrow .