[Music] foreign before we talk about perpetual and periodic inventory systems let's briefly talk about the flow of costs the flow of cost for a merchandising company starts with beginning inventory we add the cost of goods purchased to arrive at the cost of goods available for sale as goods are sold they are assigned to the cost of goods sold those goods that are not sold by the end of the accounting period represent ending inventory if we were in the classroom I would illustrate this concept with candy bars Monopoly money and 7-Eleven my top four performers on the exam would be given play money I would ask the class to pretend my table represents the checkout counter at 7-Eleven and it contains five candy bars that represents our beginning inventory During the period we purchase an additional five candy bars so we now have 10 candy bars available for sale my top performers are asked to buy a candy bar so I sell four candy bars which leaves six in my inventory to account for inventory a merchandising company must choose either a Perpetual or periodic inventory system in a Perpetual inventory system detailed records of the cost of each inventory purchase and sale these records continuously or perpetually show the inventory that should be on hand for every item a company determines the cost of goods sold each time a sale occurs so we would debit accounts receivable or cash and credit sales revenue for the selling price and we would also debit cost of goods sold and credit inventory for the cost in a periodic inventory system companies do not keep detailed inventory records of the goods on hand throughout the period they determine the cost of goods sold only at the end of the accounting period or periodically at the end of the period the company takes a physical inventory count to determine the cost of goods on hand to determine the cost of goods sold we start with the cost of goods on hand at the beginning of the accounting period this represents our beginning inventory we add to it the cost of goods purchased to arrive at our Goods available for sale we then must subtract on hand at the end of the accounting period which represents our ending inventory to arrive at our cost of goods sold in a Perpetual inventory system the accounting records continuously update so we know the quantity and cost of the inventory that should be on hand at any time a Perpetual inventory system provides better control over inventory than a periodic system since the inventory records show the quantities that should be on hand the company can count the goods at any time to see whether the goods on hand agrees with the inventory records if shortages are uncovered the company can investigate immediately [Music]