When To Adopt A Periodic Inventory System Or A Perpetual Inventory System?

January 17th, 2009 Comments off
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I wish to know which Inventory system to adopt. My main problem is that my company is not able to record Cost of goods sold at the same time that the sale is recorded. Please advise?

One of the main criteria affecting the choice of an inventory system is that where at the time of sale, the cost of goods can be recorded simultaneously. Due to some reasons like lack of costing/manpower or automation, the cost of goods sold cannot be recorded together with the sale then the Periodic Inventory System is the preferred method over the perpetual inventory system.

Using the periodic inventory system, items like purchases, freight in, and purchases returns are all recorded in separate accounts.

Whereas:

In the case of perpetual system, everything is recorded in the Merchandise inventory account.

Side-by side Comparison of the Periodic and Perpetual Systems

(a) Bought 1,000 units at $1 each

Perpetual

$

Periodic

$

Merchandise Inventory

1,000(Dr)

Purchases

1,000(Dr)

Accounts Payable

1,000(Cr)

Accounts Payable

1,000(Cr)

(b) Pay cash for freights of $500 for delivery of purchases

Perpetual

$

Periodic

$

Merchandise Inventory

500(Dr)

Freight In

500(Dr)

Cash

500(Cr)

Cash

500(Cr)

(c) Obtain 1 % cash discount for early payment

Perpetual

$

Periodic

$

Accounts Payable

1,000(Dr)

Accounts Payable

1,000(Dr)

Cash

990(Cr)

Cash

10(Cr)

Merchandise Inventory

10(Cr)

Purchase discounts

10(Cr)

(d) Sold 500 units for $2 each that cost us $1 each

Perpetual

$

Periodic

$

Accounts Receivable

1,000(Dr)

Accounts Receivable

1,000(Dr)

Sales

1,000(Cr)

Sales

1,000(Cr)

Cost of good sold

500(Dr)

No entry

Merchandise Inventory

500(Cr)

No entry

Check out other related articles regarding this:

More on the differences between Periodic and Perpetual Inventory System

Perpetual inventory system and the types of physical stocktaking

Selection Of The Best Stock Valuation Method

Effects of Incorrect Stock Valuation On Profit for the current and subsequent periods

Effect of Stock Valuation On The Gross Margin, Net Income & Asset Valuation and Capital

Valuation of Stock at the lower of cost or net realizable value

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Financial Accounting

 
 

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