Perpetual and periodic inventory method, Accounting Basics

Perpetual and Periodic inventory                                                                            

a)  Describe the difference between the perpetual inventory method and the periodic inventory method.                         

b)  Indicate for what types of inventory would each of the two inventory methods would be appropriate.

Answer:

Perpetual Inventory method:                                   

In perpetual inventory system, companies maintained detailed records of cost of each inventory purchase and sale. These records show the inventory on hand for every item. Under perpetual inventory system, the companies determine the cost of goods sold each time a sale occurs. It gives the ture and real time inventory information.                        

For example, a Ford dealership has separate inventory records for each automobile, truck, and van on its lot and showroom floor. Similarly, a grocery store uses bar codes and optical scanners to keep a daily running record of every box of cereal and every jar of jelly that it buys and sells. Perpetual inventory systems are best suited to sellers of high-volume products with multiple sales outlets, since performing physical inventory counts in these types of businesses can be time-consuming and costly.  

Periodic Inventory method:                                                                                                       

In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. They determine the cost of goods sold only at the end of the accounting period-that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand. Periodic inventory uses regular and random inventory audits to update inventory tracking information.                                        

To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:                                                                        

1. Determine the cost of goods on hand at the beginning of the accounting period.                                                                                                         

2. Add to it the cost of goods purchased.                                                                                                             

3. Subtract the cost of goods on hand at the end of the accounting period.          

Example:                                                                                                            

Some small businesses, such as car dealerships, may be able use a manual perpetual system due to their relatively low sales volume. Periodic inventory systems are best suited for businesses that sell premium-priced, low-volume products that can easily be tracked in person on a daily basis. In addition to a car dealership, art galleries and musical instrument shops are examples of businesses suited to using a periodic system.

There are significant differences between perpetual and periodic inventory method:                                    

Accounts: Under perpetual method there are continual updates to either the general ledger or inventory journal as inventory related transactions occur. Under periodic method there is no entry for cost of goods sold account untills a physical count is done to derive the cost of goods sold. 

Computer System: IT is necessary under perpetual inventory method  to maintain the data in computers because it is not possible to do it manually as thousand on transactions take place in an organization every day. Whereas periodic method is simpler as the data are consolidated at the end of period and updated in records which can be done manually?

Cycle counting: It is impossible to use cycle counting under periodic method since there is no way to obtain accurate inventory counts in real time.                     

 

Posted Date: 7/12/2012 3:04:28 AM | Location : United States







Related Discussions:- Perpetual and periodic inventory method, Assignment Help, Ask Question on Perpetual and periodic inventory method, Get Answer, Expert's Help, Perpetual and periodic inventory method Discussions

Write discussion on Perpetual and periodic inventory method
Your posts are moderated
Related Questions
The capital structure of Wild West Inc. is as follows: -    Debts: $5,000,000 (face value) bonds with coupon rate at 8.00% and present price at par -    Preferred shares: $2,000

owner got personal loan from his bank and sign note payable.what is the journal entries?

White Lightning Inc. report income from continuing operation before income taxes of $626,000 for the year ended 12/31/2004. During October of 2004, White Lightning elected to phase

A high school counselor needs to show whether the teenage pregnancy rate at her school is disimilar from the rate nationwide. She knows that the rate nationwide is 15 %. She random

In Excel, I need help with formulas

Q. Describe the accounting procedures? The demand for college professors differ greatly by discipline. In fields such like Fine Arts, English, Philosophy and Psychology there i

Q. Example on gross margin method? To demonstrate the gross margin method of computing inventory assumes that for several Years Field Company has maintained a 30 per cent gross

i have to make a journal and ledger and retained earning all of those thing can i get help

Q. Explain about Cash equivalents? Cash equivalents are highly liquid short-term investments obtained with temporarily idle cash and easily convertible into a known cash amount

“Ledger is said to be the principal book entry and the transactions can even be directly entered into the ledger account.”