Lecture Notes: Perpetual and Periodic Inventory Systems

Introduction

• Presenter: James from Accounting Stuff
• Topic: Differences between perpetual and periodic inventory systems
• Context: Part of an inventory mini-series

Definitions

• Inventory: Goods held by a business intended for sale to earn revenue.
• Perpetual Inventory System:
  • Continuously updates inventory records as goods are bought and sold.
  • Allows real-time tracking of inventory levels.
• Periodic Inventory System:
  • Updates inventory records at regular intervals (e.g., monthly, quarterly, yearly).
  • Relies on physical inventory counts.

Pros and Cons

• Perpetual System:
  • Pros: Real-time updates, easy tracking of inventory levels.
  • Cons: Expensive to set up, potential discrepancies between recorded and actual inventory due to losses, theft, or errors.
• Periodic System:
  • Pros: Simple, lower set up costs.
  • Cons: Delayed results, less control over inventory between counts.

Example Scenario

• Business: Book shop
• Scenario:
  • End of September: 300 books at $8 each
  • October: Bought 500 books at $8 each, sold 450 books at $15 each

Inventory Valuation Methods

• Mentioned: FIFO, LIFO, and Average Cost
• Note: These methods will be covered in future videos.

Accounting for Transactions

Step-by-Step Process

1. Opening Inventory:

   • Last period’s closing inventory becomes this period’s opening inventory.
   • Example: 300 books x $8 = $2,400 (debit in inventory T-account).

2. Recording Additions:

   • Perpetual System: Additions recorded in inventory account.
   • Periodic System: Additions recorded in purchases account.
   • Example: 500 books x $8 = $4,000.

3. Recognizing Sales:

   • Perpetual System:
     • Recognize revenue and cost of goods sold (COGS) as sales occur.
   • Periodic System:
     • Recognize revenue only at sales; COGS determined after inventory count.
   • Sales Example: 450 books x $15 = $6,750.

4. Updating Inventory:

   • Perpetual Method: Real-time updates of inventory and COGS.
   • Periodic Method:
     • Requires physical count, transfer additions from purchases to inventory.
   • Example: Closing inventory 350 books x $8 = $2,800.

5. Calculating COGS:

   • Perpetual System: COGS continuously updated.
   • Periodic System: COGS calculated post-inventory count.
   • Calculation: Total purchases cleared to inventory account.

Conclusion

• COGS ends up the same under both methods, but perpetual provides real-time insight while periodic requires end-period inventory counts.
• Resources: Inventory systems cheat sheet available on the presenter’s website.
• Upcoming: More videos on inventory methods, including FIFO, LIFO, and more.