Perpetual and Periodic Inventory Method Inventories Perpetual Inventory Method:

Perpetual inventory method is a method where the inventory accounting is set aside

incessantly up-to-date and integrates the recurrent recording of additions to and issues or sales of supplies on an every day basis. The method is appropriate to those businesses where the sale articles are of huge value and posses a volume of sale transactions every day. Under this system, a ledger account (inventory account) is kept which presents the cost of goods sold at any point of time during the financial accounting period. When a perpetual inventory is maintained, a physical inventory must be taken as a minimum of once a year.

PeriodicInventory Method:
Under this method, a physical inventory is generally taken only towards the year end or at standard intervals. The inventory on hand and for this reason the cost of goods sold are ascertained by the way of physical count at periodic intervals or towards the end of period. This method is expensive as well as tiresome. To determine the cost of goods sold under this method, the account books must present the following: I. Opening and closing inventory account for the accounting period II. The cost of the purchased inventory during the accounting period.

The Valuation Is Done As Under:

Inventory at the beginning of the accounting period Add: Purchases of inventory during the accounting period Cost of Goods sold obtainable for sale Less: Inventory at the ending accounting period Cost of Goods Sold
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The Below Is The Scheme Of Working Of The Periodic Inventory Method:

I. Most recent years closing inventory becomes the beginning inventory for the present year. Trading account is given debit with the beginning year. Purchases during the accounting period are recorded in the Purchases Account and this account is closed by transferring to trading account as stated above.

II.

The Below Is The Scheme Of Working Of The Periodic Inventory Method:

III. The closing inventory which is depended on physical count is documented in an account called closing stock account. This account is transferred to the trading account by giving debit to closing stock account and given credit to trading account. This account posses a life for one day only. This is for the reason that, it becomes beginning stock of the subsequent accounting period. IV. The resultant outcome (i.e. the balancing figure in the trading account) is the cost of goods sold.

Documenting Inventory Acquisitions and Sales:

S.No Perpetual Inventory System Periodic Inventory System

1.

Purchase of Inventory Inventory A/c To Supplies A/c

Return of Inventory Suppliers A/c To Inventory A/c Freight Paid Inventory A/c To Cash A/c Sale of Inventory

Purchase of Inventory Purchases A/c To Suppliers A/c

Return of Inventory Suppliers A/c To Return Outwards A/c Freight Paid Carriage Inward A/c To Cash A/c Sale of Inventory

2.

3.

4.

Documenting Inventory Acquisitions and Sales:

S.No Perpetual Inventory System Periodic Inventory System

(i)

Accounts Receivables A/c To Sales A/c

Cost of Goods Sold A/c To Inventory A/c Return of Goods by Customer Return Inwards A/c To Accounts Receivables A/c Inventory A/c To Cost of Goods Sold A/c

Accounts Receivables A/c To Sales A/c

No entry is applicable Return of Goods by Customer Return Inwards A/c To Accounts Receivables A/c No entry is applicable

(ii) 5. (i) (ii)

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