Lecture_3_More_on_Perpetual_VS_Periodic - Lecture 3 More on...

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Lecture 3 More on Perpetual VS Periodic Perpetual inventory systems are the most common systems in use today , due to both technology and the advantages that perpetual systems create for inventory control. Other advantages to perpetual systems include the ability to measure profitability during an interim period , without having to take a physical count of the inventory In a periodic inventory system , purchases are recorded in a separate, purchases account. Returns are recorded in the purchase returns and allowances account. Freight in is added to determine goods available for sale. When inventory is sold, however, no transaction is recorded to reflect the "use", that is the sale of that inventory. The cost of the inventory sold is calculated when ending inventory is counted and a dollar value for the inventory is established. That amount is then subtracted from goods available for sale to determine cost of goods sold, and ultimately gross margin and net income. And, the net income won't be known until that ending inventory is counted! So, if results need to be determined before the end of the fiscal period, then that ending inventory would have to be estimated! Under a perpetual system , purchases are recorded directly in the merchandise inventory account as debits to that asset account. Returns are recorded as credits to merchandise inventory. When inventory is sold, the sale transaction is recorded, but another transaction is recorded simultaneously to transfer the cost of that inventory to an expense account called cost of goods sold. The result is that the merchandise inventory account is maintained all the time, that is, perpetually. At the end of the accounting period, a physical count of inventory is still taken and is compared to the merchandise inventory general ledger account. The difference between the two is recorded as a debit to inventory shrinkage expense and a credit to merchandise inventory. The perpetual system, therefore, allows the company to monitor how much of the inventory is lost due to theft, breakage, or such. Perpetual inventory systems are the most common methods in use today,
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Lecture_3_More_on_Perpetual_VS_Periodic - Lecture 3 More on...

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