Perpetual and Periodic Inventory Systems

Introduction

• Presenter: James from Accounting Stuff
• Context: Continuation of inventory mini-series
• Goal: Explain perpetual and periodic inventory systems, their differences, and how they work

Definitions

• Inventory in Merchandising: Goods held by a business to sell and earn revenue
• Perpetual Inventory System:
  • Continuously updates inventory accounts as goods are bought and sold
  • Tracks inventory on a unit-by-unit basis
• Periodic Inventory System:
  • Updates inventory at regular intervals (e.g., end of month/quarter/year)
  • Triggered by physical inventory count

Pros and Cons

Perpetual Inventory System

• Pros:
  • Real-time tracking of inventory levels
  • Identifies stock shortages quickly
• Cons:
  • Can be expensive to set up
  • Potential discrepancies between system and physical inventory (due to theft, loss, or errors)

Periodic Inventory System

• Pros:
  • Simpler and cheaper to set up
• Cons:
  • Results are delayed
  • Less control and visibility over inventory between counts

Example Scenario

• Business: Bookshop
• Starting Inventory: 300 books at $8 each
• October Purchase: 500 books at $8 each
• Sales: 450 books at $15 each
• Cost Valuation Methods: FIFO, LIFO, Average Cost (to be covered in future videos)

Accounting for Transactions

Calculation Overview

• Opening Inventory = 300 books x $8 = $2,400
• Additions in October = 500 books x $8 = $4,000
• Cost of Goods Available for Sale = $2,400 + $4,000
• Cost of Goods Sold = 450 books x $8 = $3,600
• Closing Inventory Calculation =
  • Cost of Goods Available - Cost of Goods Sold

Perpetual System

• Records Additions and Sales in Real-Time:
  • Journal Entries:
    • Additions: Debit Inventory, Credit Cash/Accounts Payable
    • Sales:
      • Credit Revenue (450 x $15 = $6,750)
      • Debit Cash/Accounts Receivable (450 x $15 = $6,750)
      • Credit Inventory (450 x $8 = $3,600)
      • Debit Cost of Goods Sold (450 x $8 = $3,600)
• Inventory Continuously Updated: Closing balance can be calculated at any time

Periodic System

• Records Additions in Purchases Account:
  • Journal Entry:
    • Debit Purchases, Credit Cash/Accounts Payable
• Sales Only Recognize Revenue:
  • Credit Revenue, Debit Cash/Accounts Receivable
• Closing Inventory Count Needed for Cost of Goods Sold:
  • Conduct physical count
  • Adjust purchases to inventory account at end of period
  • Calculate final Cost of Goods Sold after inventory count

Key Differences in Timing

• Perpetual: Real-time results
• Periodic: Results obtained post-inventory count

Conclusion

• Cheat Sheet Available: Summarizes key points and can be purchased online
• Future Content: More inventory methods and details to be covered in upcoming videos
• Engagement: Encouragement to subscribe for more content

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This summary provides a comprehensive overview of the perpetual and periodic inventory systems as presented by James in his video on Accounting Stuff.