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