When a company uses the perpetual inventory system and makes a purchase, they will automatically update the Merchandise Inventory account. There are some key differences between perpetual and periodic inventory systems.

Keeping in mind considerations such as gross profit, inventory turnover, meeting demand, point-of-sale systems, and timeliness of accounting information, what other accounting challenges might arise regarding the company’s inventory accounting processes? Inventory Systems Comparison As inventory will represent one of the largest items on the balance sheet, it is vital that Gearhead management take due care with decisions related to inventory accounting. These are all accounting challenges Gearhead faces with respect to inventory. What is the correct cost flow assumption for Gearhead to accurately account for inventory? Should it use a first-in, first-out method, or last-in, first-out? Did Gearhead match the cost of sale with the sale itself? Was only inventory that belonged to the company as of the period end date included? Did Gearhead count all the inventory? Perhaps some goods were in transit (on a delivery truck for a sale just made, or en route to Gearhead). In accounting for inventory, matching principle, valuation, cutoff, completeness, and cost flow assumptions are all important. Proper application of accounting principles is vital to keep accurate books and records. Are items included as inventory in the books that should not be?.Is all inventory included in the books?.Is any of the inventory obsolete and, if so, how will it be accounted for?.How will inventory in the books be valued?.What method of accounting for inventory is appropriate?.The proper presentation of inventory in a company’s books leads to a number of accounting challenges, such as: Therefore, one of the biggest assets on Gearhead’s balance sheet is inventory. Gearhead Outfitters is a retailer of outdoor-related gear such as clothing, footwear, backpacks, and camping equipment. Under GAAP, once values are reduced they cannot be increased again. The main difference is that assets are valued at net realizable value and can be increased or decreased as values change. Generally Accepted Accounting Principles (GAAP) do not state a required inventory system, but the periodic inventory system uses a Purchases account to meet the requirements for recognition under GAAP. There is a gap between the sale or purchase of inventory and when the inventory activity is recognized. The update and recognition could occur at the end of the month, quarter, and year. You can consider this “recording as you go.” The recognition of each sale or purchase happens immediately upon sale or purchase.Ī periodic inventory system updates and records the inventory account at certain, scheduled times at the end of an operating cycle. Characteristics of the Perpetual and Periodic Inventory SystemsĪ perpetual inventory system automatically updates and records the inventory account every time a sale, or purchase of inventory, occurs. Let’s look at the characteristics of these two systems. They can use a perpetual or periodic inventory system. The total value of the items held in stock is reﬂected in the inventory asset account and the cost of sale is recognised at the time of selling the good.There are two ways in which a company may account for their inventory. Expense/COS is increased when the item is purchasedĪ method of accounting for inventory whereby the records of on-hand quantities of items is kept up to date by recording every time an item leaves or enters inventory.A journal must be done at the end of the period in order to show inventory as an asset on the Balance Sheet, & to adjust the COS.On hand amounts are NOT tracked by MYOB.Using this method, when inventory is purchased it is usually charged to a cost of sales account.

This support note will explain about the difference between periodic inventory and perpetual inventory.Ī method of accounting for inventory whereby the goods on-hand are determined by a physical count and the cost of goods sold equals opening inventory plus net purchases, less closing inventory.

Periodic and perpetual inventory