PERPETUAL INVENTORY SYSTEM
A perpetual inventory system uses a physical inventory count to test the accuracy of separate continuous records of quantity increases and decreases (and resulting balances of the) in various items of merchandise in the inventory both on the sales floor and in the warehouse. In a perpetual inventory system, a physical inventory count must be taken not less frequently than annually, but more often is recommended for high value items.
The perpetual inventory system provides for the manager to maintain the dollar value of the continuous record of quantities of units of merchandise and to identify at least annually any differences between the perpetual inventory record and the actual count of merchandise inventory. The required correction of the perpetual inventory record results from the physical inventory count. The required correction to the UFAS account Merchandise Inventory that results from the physical inventory count is accomplished using adjusting journal entries.
In the perpetual inventory system, items of merchandise are costed/valued using the "Moving Average" or "FIFO" methods. (See "Inventory Valuation Calculations" in this section.) The unit may not change inventory valuation procedures from one year to the next without approval from the Office of Business and Financial Services, Accounting Division.
Perpetual inventory record - Adjust the perpetual inventory record for each line item to reflect the quantity and value of the physical inventory. The new valuation of the perpetual inventory record is recorded in UFAS as a debit or a credit to Inventory Over/Short (SL object code 0920) and a credit or a debit to Inventory for Resale (GL account control 1501).
Periodic Inventory System:
Under the periodic inventory system, the company usually waits until the end of an accounting period to take a physical inventory; it does not maintain detailed records of physical inventory on hand during the period. The cost of goods sold is computed after a physical inventory is taken.
Updating Inventory Balance in a Periodic Inventory System:
Since the merchandise inventory account is not continuously updated for purchases or sales of inventory items it must be updated through the recording of journal entries. At the end of the accounting period under a periodic inventory system, it is necessary to:
1. remove the beginning balance from the Merchandise Inventory account,
2. enter the ending balance in the Merchandise Inventory account, and
3. enter these two amounts in the Income Summary account to calculate net income.
These objectives are accomplished by debiting Income Summary and crediting Merchandise Inventory for the beginning balance, and debiting Merchandise Inventory and crediting Income Summary for the ending balance.
Related Accounting Entries
Inventory Procedures at End of Period
Transfer the balance of the beginning inventory to the Income Summary account
Take a physical inventory of the goods on hand at the end of the period, and establish the balance of the ending inventory
There are two ways of accomplishing these effects.
Under the adjusting entry method, the entries are included among the adjusting entries.
Under the closing entry method, the entries are included among the closing entries.