Perpetual+vs+Periodic+Inventory+System

[] =Perpetual vs Periodic Inventory System =  Perpetual inventory system and periodic inventory systems are the two systems of keeping records of inventory. 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. 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.

Differences Between Perpetual and Periodic System
Following are the main differences between perpetual and periodic inventory systems:
 * **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.
 * **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.
 * **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.
 * **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.

=Periodic Inventory System Journal Entries =

 Periodic inventory system updates inventory balance once in a period. We discussed this concept in the [|perpetual-periodic inventory comparison]. Here, we will learn the typical journal entries under a periodic inventory system.

Let us assume that all sales and purchases are on credit. Also assume that where discounts are provided or availed on sales/purchases, they are recorded using the gross method (to learn more about gross method, see [|discount on sales] and [|discount on inventory purchases] ).

Following are the typical journal entries under a periodic inventory system:

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Inventory Purchase:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">The purchase of inventory is recorded by debiting purchases account and crediting accounts payable.


 * Purchases ||> — — ||>  ||
 * Accounts Payable ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Purchase Discount:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Under gross method, purchase discount is recorded using the following journal entry:


 * Accounts Payable ||> — — ||>  ||
 * Purchase Discounts ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Note:** The above two [|journal entries] are usually combined in a single entry which is shown below:


 * Purchases ||> — — ||>  ||
 * Accounts Payable ||>  ||> — — ||
 * Purchase Discounts ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Purchase Return:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Purchase returns are recorded as shown below


 * Accounts Payable/Accounts Receivable ||> — — ||>  ||
 * Purchase Returns ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Inventory Sale:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Unlike [|perpetual inventory system], the periodic inventory system records the transaction of sale via a single journal entry:


 * Accounts Receivable ||> — — ||>  ||
 * Sales ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Sales Discounts:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">A sales discount is recorded as shown below:


 * Sales Discount ||> — — ||>  ||
 * Accounts Receivable ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Again, the above two entries are combined in a period inventory system as shown below:


 * Accounts Receivable ||> — — ||>  ||
 * Sales Discounts ||>  ||> — — ||
 * Sales ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Sales Return:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Similarly, sale returns are also recorded via a single journal entry:


 * Sales Returns ||> — — ||>  ||
 * Accounts Receivable/Accounts Payable ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">At the end of each accounting period, the value of ending inventory is determined by physical count. Cost of goods sold is determined either as a balancing figure in the closing entry shown at the end or by using the following formula:


 * COGS = Beginning Inventory + Purchases − Ending Inventory ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">The [|closing entry] required in a periodic inventory system debits:


 * <span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">inventory account by the value of ending inventory
 * <span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">cost of goods sold account by the value as determined above or by the balancing figure

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">and credits:


 * <span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">inventory account by beginning inventory
 * <span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">purchases account

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">The entry is shown below:


 * Inventory (Ending Inventory) ||> — — ||>  ||
 * Cost of Goods Sold (Balancing Figure) ||> — — ||>  ||
 * Inventory (Beginning Inventory) ||>  ||> — — ||
 * Purchases ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">A simplified form of the above journal entry uses a single debit or credit to inventory account by calculating the difference of ending inventory and beginning inventory. If the difference is positive, the inventory account will be debited for the difference and if it the difference is negative, the journal entry will credit the inventory account by the difference.

<span style="background-color: #ffffff; color: #707070; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Written by Irfanullah Jan

=<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 18px;">Perpetual Inventory System Journal Entries =

<span style="background-color: #ffffff; color: #494949; display: block; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;"> <span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Under perpetual inventory system, inventory and cost of goods sold are updated for each sale/purchase and return transaction. We have already discussed the basic concept of perpetual inventory system in the [|comparison of perpetual-periodic inventory]. Here we will learn the journal entries which are typical to a perpetual inventory system:

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Following are the journal entries under perpetual inventory system assuming that sales and purchases are recorded net of discount (to learn more, see [|gross vs net method] of inventory purchase recording and [|discount on sales] .).

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Inventory Purchase:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Under perpetual inventory system, a purchase is recorded by debiting inventory account and crediting accounts payable assuming that the purchase is on credit. The journal entry is shown below:


 * Inventory ||> — — ||>  ||
 * Accounts Payable ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Purchase Discount:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Purchase discount will reduce the inventory directly. Thus:


 * Accounts Payable ||> — — ||>  ||
 * Inventory ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Purchase Return:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">When inventory purchased is subsequently returned to the supplier, the journal entry is to debit accounts payable or accounts receivable and credit inventory account.


 * Accounts Receivable/Accounts Payable ||> — — ||>  ||
 * Inventory ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Inventory Sale:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">A transaction of sale is recorded via two journal entries in perpetual inventory system. The first one records the sale value of inventory and the second one records the cost of goods sold and reduces the inventory balance. The two journal entries are shown below:


 * Accounts Receivable ||> — — ||>  ||
 * Sales ||>  ||> — — ||


 * Cost of Goods Sold ||> — — ||>  ||
 * Inventory ||>  ||> — — ||

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">**Sales Return:**

<span style="background-color: #ffffff; color: #494949; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">The recording of sales return also requires two [|journal entries]. Which are shown below:


 * Sales Returns ||> — — ||>  ||
 * Accounts Receivable/Accounts Payable ||>  ||> — — ||


 * Inventory ||> — — ||>  ||
 * Cost of Goods Sold ||>  ||> — — ||

<span style="background-color: #ffffff; color: #707070; font-family: Verdana,Geneva,Candara,sans-serif; font-size: 12px;">Written by Irfanullah Jan