Perpetual Inventory System:
It is a method where the inventory accounting is kept continuously up-to-date and involves the continual recording of additions to and issues or sales of materials on a daily bases. This method is applicable to those businesses where the sale items are high vale and have a number of sale transactions on daily basis.
Under this system, a ledger account (Inventory account title) is maintained which shows the cost of goods sold at any time during the accounting period. When perpetual inventory is kept, a physical inventory should be taken at least once in a year.
Advantages of Perpetual Inventory System:
- Protects material against theft and loss.
- Helps in reducing wastages and spoilages.
- Inventory levels can be fixed and observed.
- Frequent physical counting is easy
- Production process need not be stopped for physical stock taking.
- Helps in prompt preparation of financial statements by providing the stock figure.
- Relevant staff inefficiency in handling/ storage, resulting in wastage is revealed.
- Proper recording of consumption helps in future planning.
- Slow moving and obsolete stock can be highlighted.
- Difference between physical counts and book balance can be investigated.
- Material returns can be controlled and highlighted.
- Helps in keeping minimum investment in inventory
- Serves as a moral check.
Periodic Inventory system:
Under this system, a physical inventory count is usually taken at the year-end or at regular intervals. The inventory on hand and cost of goods sold are determined by means physical takings OR are determined physically at the periodic intervals such as quarterly or semi annually, or at the end of period.
Journal Entries:
| Transactions | Perpetual System | Periodic System |
| Purchase if inventory | Inventory a/c
To Suppliers a/c
| Purchases a/c
To Suppliers a/c
|
| Return of Inventory | Suppliers a/c
To inventory a/c
| Suppliers a/c
To purchase returns a/c
|
| Freight Charges paid | Inventory a/c
To cash a/c
| Carriage Inwards a/c
To cash a/c
|
Sale of Inventory
1.
| Sundry Debtors a/c
To sales a/c
Cost of Goods sold a/c
To Inventory a/c
| Sundry Debtors a/c
To sales a/c
No entry..
|
| Goods Returned by customers | Sales Return a/c
To sundry debtors a/c
Inventory a/c
To cost of goods sold a/c
| Sales Returns a/c
To sundry Debtors a/c
No entry…
|
| Opening Stock | No entry | Trading a/c
To stock a/c
|
| Closing Stock | No entry | Stock a/c
To trading a/c
|
| Normal Loss
Abnormal Loss
| Cost of Goods sold a/c
To inventory a/c
Abnormal Loss a/c
To inventory a/c
| No entry..
Abnormal Loss a/c
To purchases a/c
|
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