Merchandising Business and its accounting entries

Merchandising Business and its accounting entries

An inventory system under which the company does not keep detailed inventory records throughout the accounting period but determines the cost of goods sold only at the end of an accounting period. The periodic inventory system only updates the ending inventory balance in the general ledger when you conduct a physical inventory count. Since physical inventory counts are time-consuming, few companies do them more than once a quarter or year. In the meantime, the inventory account in the accounting system continues to show the cost of the inventory that was recorded as of the last physical inventory count.

Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a purchases account. When a physical inventory count is done, you then shift the balance in the purchases account into the inventory account, which in turn is adjusted to match the cost of the ending inventory. Journal Entries: Purchases purchases Debit Because Of Increase in Asset. Calculation of cost of goods sold under the periodic inventory system: Beginning inventory + Purchases = Cost of goods available for sale Cost of goods available for sale – Ending inventory = Cost of goods sold Journal

Entries: Ending Inventory Included Inventory (Beginning inventory) Ending Inventory Deducted Inventory (Ending Inventory) Income Statement: Beginning Inventory Cost of Goods Sold Available for Sale Ending Inventory Difference: Periodic and Perpetual Inventory System There are a number of significant differences between the periodic and perpetual inventory systems. The periodic system relies upon an occasional physical count of the inventory to determine the ending inventory balance and the cost of goods sold, while the perpetual system keeps continual track of inventory balances. Both methods are used to track the quantity of goods on hand.

The key differences between the two systems are: Accounts. Under the perpetual system, there are continual updates to either the general ledger or inventory journal as inventory-related transactions occur. Conversely, under a periodic inventory’ system, there is no cost of goods sold account entry at all in an accounting period until such time as there is a physical count, which is then used to derive the cost of goods sold. Computer systems. It is impossible to manually maintain the records for a perpetual inventory system, since there ay be thousands of transactions at the unit level in every accounting period.

Conversely, the simplicity of a periodic inventory system allows for the use of manual record keeping for very small inventories. Cost of goods sold. Under the perpetual system, there are continual updates to the cost of goods sold account as each sale is made. Conversely, under the periodic inventory system, the cost of goods sold is calculated in a lump SUIT at the end of the reporting period, by adding total purchases to the beginning inventory and subtracting ending inventory. Cycle counting.

It is impossible to use cycle counting under a periodic inventory system, since there is no way to obtain accurate inventory counts in real time (which are used as a baseline for cycle counts). Transaction investigations. It is nearly impossible to track through the accounting records under a periodic inventory system to determine why an inventory-related error of any kind occurred, since the information is aggregated at a very high level. Conversely, such investigations are much easier in a perpetual inventory system, where all transactions are available in detail at the individual unit level.

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