Lesson in Bookkeeping

1. PERIODIC INVENTORY vs.
PERPETUAL INVENTORY
The two distinctly different systems that are used in
measuring the ending inventory are:
● PERPETUAL INVENTORY SYSTEM – this system
involves the maintenance of detailed inventory records
in the accounting system. Continuous record is
maintained on a transaction-by-transaction basis
throughout the period.
● PERIODIC INVENTORY SYSTEM – under this
system, no detailed record of inventory is being
maintained during the year. An actual physical count
of the goods remaining on hand is required at the end
of each period.

2. DISADVANTAGES
PERIODIC INVENTORYPERIODIC INVENTORY
● The necessity (and cost)
to take a complete
physical count of all
merchandise on hand at
the end of each period for
which financial
statements are to be
prepared.
● Lack of inventory control
(for purchasing purposes
and measurement of
theft).
PERPETUAL INVENTORYPERPETUAL INVENTORY
●
The maintenance of a
separate inventory record
for each type of goods
stocked on a transaction-
by transaction basis can
be time consuming and
costly.
● May involve a
considerable amount of
clerical effort.

3. PERIODIC INVENTORY SYSTEM
COST OF GOODS SOLD MODEL:
Cost of Goods Sold = Beg. Inventory
+
Purchases of the Period
-
Ending Inventory

4. PERPETUAL INVENTORY RECORD
Item: Super x Unit
Price
P 200-
Location Storage Rm
Date Explanation Qty
Pur-
chased
Cost Qty
Sold
Cost Balance
on
Hand
Cost
Jan 1 Beg. Inventory 8 1,600-
Jan 31 Sold 5 1,000- 3 600-
Feb 5 Purchases 10 2,000- 13 2,600-
Mar 6 Return sales (1) (200-) 12 2,400-
Recap:
Total Purchases: 10 2,000-
CGS: 4 800-
End Inventory: 12 2,400-

5. RECORDING OUTLINE (PERIODIC)
● Record all purchases – During the period the
purchase cost of all goods bought is accumulated in
an account called Purchases.
● Record all sales – During the period, the sales price
for all goods sold is accumulated in a Sales
Revenue account.
● Count the number of units on hand – At the end of
the period, the Inventory Account Balance still
reflects the inventory amount carried over from the
prior period since no entries are made to the
Inventory account during the current period.

6. Thus, to measure the Ending Inventory for the
current period, a physical inventory count must be
made of all goods on hand.
● Compute the cost of the Ending Inventory – the
amount of the ending inventory quantities is
computed by multiplying the number of units found
as determined by the inventory count to be on hand
times to their unit purchase cost.
● Compute Cost of Goods Sold – After the ending
inventory valuations is measured, cost of goods sold
for the period must be computed as per cost of
goods sold model presented on Slide no. 3.

7. RECORDING OUTLINE (PERPETUAL)
● Record all purchases – During the period, the
purchase cost of each type of goods bought is
entered in the Inventory ledger account as an
increase and in a detailed perpetual inventory record
as shown in the table under slide no. 4.
● Record all sales – During the period, each sales is
recorded by means of two companion entries. One
entry is to record the Sales Revenue at sales price,
and the other entry is to record the Cost of Goods
Sold at purchase cost.

8. ● Record all returns – During the period, Purchase
Returns and Sales Returns are recorded in the
Inventory account and on the perpetual inventory
record at cost.
● Use Cost of Goods Sold and Inventory Amounts –
At the end of the period, the balance in the Cost of
Goods Sold accounts provides the total amount of
that expense that is reported on the income
statement.

9. DIFFERENCES BETWEEN
PERIODIC AND PERPETUAL
● Inventory
a. Periodic – During the period, the inventory
account is not change; thus, it reflects the beginning
inventory amount. During the period, each purchase
is recorded in the Purchases account. As a
consequence, the ending inventory eache period
must be measured by physical count, then ”costed”
at unit price cost.
b. Perpetual - During the period, the Inventory
account is increased for each purchase and
decreased (at cost) for each sale. Thus, at the end

10. of the period, it measures ending inventory.
● Cost of Goods Sold
a. Periodic – During the period, no entry is made for
cost of goods sold. At the end of the period, after
the physical inventory count, cost of goods sold is
measured as:
Beg. Inventory + Purchases – End. Inventory = Cost
of Goods Sold
b. Perpetual - During the period, cost of goods sold
is recorded at the time of each sale and the Inventory
account is reduced (at cost). Thus the system
measure the cost of goods sold amount for the
period.

11. ADVANTAGES OF PERPETUAL
INVENTORY OVER PERIODIC
INVENTORY● It provides continuous inventory amounts
● It provides the cost of goods sold amount without the necessity of
taking a periodic inventory count.
● It provides continuing information necessary to maintain minimum
and maximum inventory levels by appropriate timing of purchases.
● It provides continuing information about the quantity of goods on
hand at various locations.
● It provides a basis for measuring the amount of theft.It provides
cost of goods sold information needed to record sales at both selling
price and cost.
● It is readily adaptable to use of computers to process quickly large
quantities of inventory data.