There are two ways that inventory is managed: the perpetual inventory system or periodic inventory system. This chapter focuses on the perpetual system. In a perpetual inventory system, the Merchandize Inventory and Cost Of Goods Sold accounts in the general ledger are updated immediately when a purchase or sale of goods occurs. When merchandize inventory is purchased, the cost is debited to the Merchandize Inventory account. As inventory is sold to customers, the cost of the inventory sold is removed from the Merchandize Inventory account and debited to the Cost Of Goods Sold account. Under a perpetual system, the detailed composition of merchanides inventory – item description, number of items, cost per item, and total cost – is known at any time. However, a physical count is still performed at the end of the accounting period to determine and adjust for differences between the actual inventory on hand and the Merchandize Inventory account balance in the general ledger.
Some businesses will use a periodic inventory system instead. The purchase of merchandize inventory is debited to a temporary account called Purchases in the general ledger. At the end of the accounting period, inventory is counted, the Merchandize Inventory account is updated, and cost of goods sold is calculated. In a periodic inventory system, the real-time balances in Merchandize Inventory and Cost Of Goods Sold accounts are not known. The entry to record this difference is discussed later in this chapter. The periodic system is discussed in greater detail in the appendix to this chapter.
- 1487 reads
