Under perpetual inventory procedure, the Merchandise Inventory account is continuously updated to reflect items on hand, and under the periodic method we wait until the END to count everything.
The following video explains the difference between periodic and perpetual inventory methods:
Companies use perpetual inventory procedure in a variety of business settings. Historically, companies that sold merchandise with a high individual unit value, such as automobiles, furniture, and appliances, used perpetual inventory procedure. Today, computerized cash registers, scanners, and accounting software programs automatically keep track of inflows and outflows of each inventory item. Computerization makes it economical for many retail stores to use perpetual inventory procedure even for goods of low unit value, such as groceries.
Under perpetual inventory procedure, the Merchandise Inventory account provides close control by showing the cost of the goods that are supposed to be on hand at any particular time. Companies debit the Merchandise Inventory account for each purchase and credit it for each sale so that the current balance is shown in the account at all times. Usually, firms also maintain detailed unit records showing the quantities of each type of goods that should be on hand. Company personnel also take a physical inventory by actually counting the units of inventory on hand. Then they compare this physical count with the records showing the units that should be on hand.
Merchandising companies selling low unit value merchandise (such as nuts and bolts, nails, Christmas cards, or pencils) that have not computerized their inventory systems often find that the extra costs of record-keeping under perpetual inventory procedure more than outweigh the benefits. These merchandising companies often use periodic inventory procedure.
Under periodic inventory procedure, companies do not use the Merchandise Inventory account to record each purchase and sale of merchandise. Instead, a company corrects the balance in the Merchandise Inventory account as the result of a physical inventory count at the end of the accounting period. Also, the company usually does not maintain other records showing the exact number of units that should be on hand. Although periodic inventory procedure reduces record-keeping, it also reduces control over inventory items. Firms assume any items not included in the physical count of inventory at the end of the period have been sold. Thus, they mistakenly assume items that have been stolen have been sold and include their cost in cost of goods sold.http://www.openassessments.org/assessments/1264
Week 3 DQ2 -Merchandise Inventory - ACC205 Principles of Accounting I - Ashford University
ACCT 205 • Ashford University