Perpetual and Periodic Inventory Method – Inventories Perpetual Inventory Method

Perpetual and Periodic Inventory Method – Inventories Perpetual Inventory Method:

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Perpetual inventory method is a method where the inventory accounting is set aside

incessantly up-to-date and integrates the recurrent recording of additions to and issues or sales of supplies on an every day basis. The method is appropriate to those businesses where the sale articles are of huge value and posses a volume of sale transactions every day.  Under this system, a ledger account (inventory account) is kept which presents the

cost of goods sold at any point of time during the financial accounting period. When a perpetual inventory is maintained, a physical inventory must be taken as a minimum of once a year.

PeriodicInventoryMethod: Under this method, a physical inventory is generally taken only towards the year end or at standard intervals. The inventory on hand and for this reason the cost of goods sold are ascertained by the way of physical count at periodic intervals or towards the end of period. This method is expensive as well as tiresome. To determine the cost of goods sold under this method, the account books must present the following: I. Openin Openingg and clos closing ing inv invent entory ory accou account nt for for the accou accounti nting ng period period II. The co cost st of the the purchased purchased invento inventory ry during during the accoun accounting ting period. period.

The Valuation Is Done As Under: Inventory at the beginning of the accounting period Add: Purchases of inventory during the accounting period Cost of Goods sold obtainable for sale Less: Inventory at the ending accounting period Cost of Goods Sold

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The Below Is The Scheme Of Working Of The Periodic Inventory Method: I.

Most recent year’s closing inventory becomes the beginning inventory for the present

year. Trading account is given debit with the beginning year. II.

Purchases Purcha ses durin duringg the the accoun accountin tingg period period are reco recorde rdedd in the Purch Purchases ases Acco Account unt and and this account is closed by transferring to trading account as stated above.

The Below Is The Scheme Of Working Of The Periodic Inventory Method: III. The closin closingg inventory inventory which is depend depended ed on on physical physical coun countt is documen documented ted in an account account called closing stock account. This account is transferred to the trading account by giving debit to closing stock account and given credit to trading account. This account posses a life for one day only. This is for the reason that, it becomes beginning stock of the subsequent accounting period. IV. The resulta resultant nt outcom outcomee (i.e. (i.e. the the balancin balancingg figure figure in the tradin tradingg account) account) is the cost of goods sold.

Documenting Inventory Acquisitions and Sales: S.N o 1.

2.

Perpetual Inventory System Purchase of Inventory Inventory A/c To Supplies A/c Return of Inventory Suppliers A/c To Inventory A/c

Periodic Inventory System Purchase of Inventory Purchases A/c To Suppliers A/c Return of Inventory Suppliers A/c To Return Outwards A/c

3.

Freight Paid Inventory A/c To Cash A/c

Freight Paid Carriage Inward A/c To Cash A/c

4.

Sale of Inventory

Sale of Inventory

Documenting Inventory Acquisitions and Sales: S.N o

Perpetual Inventory System

Periodic Inventory System

Accounts Receivables A/c To Sales A/c

Accounts Receivables A/c To Sales A/c

(ii)

Cost of Goods Sold A/c To Inventory A/c

No entry is applicable

5.

Return of Goods by Customer

Return of Goods by Customer

(i)

Return Inwards A/c To Accounts Receivables A/c

Return Inwards A/c To Accounts Receivables A/c

(ii)

Inventory A/c To Cost of Goods Sold A/c

No entry is applicable

(i)

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