{"id":193,"date":"2024-09-06T16:47:21","date_gmt":"2024-09-06T16:47:21","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/periodic-inventory-system-compared-to-perpetual\/"},"modified":"2024-09-11T19:07:37","modified_gmt":"2024-09-11T19:07:37","slug":"periodic-inventory-system-compared-to-perpetual","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/periodic-inventory-system-compared-to-perpetual\/","title":{"raw":"Periodic Inventory System Compared to Perpetual","rendered":"Periodic Inventory System Compared to Perpetual"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Compare and contrast periodic and perpetual inventory systems<\/li>\r\n<\/ul>\r\n<\/section>One of the challenges of the periodic inventory method is making appropriate updates to the general ledger (GL). With a computerized perpetual inventory system, the GL is updated automatically, but the periodic system doesn\u2019t allow that.\r\n\r\nRather than debiting Inventory, a company using periodic inventory debits a temporary account\u00a0called Purchases. Any adjustments related to these purchases of goods will later be credited to a GL\u00a0contra account such as Purchases Discounts or Purchases Returns and Allowances. When the balances of these three purchases accounts (Purchases, Purchase Discounts, and Purchase Returns and Allowances) are combined, the resulting amount is known as net purchases.\r\n\r\nWhen goods are sold under the periodic inventory system, there is no entry to credit the Inventory account or to debit the account Cost of Goods Sold. Hence, the Inventory account contains only the ending balance from the previous year. As a result, the company must compute an inventory amount at the end of each accounting period in order to report the amount of its ending inventory for its balance sheet and the cost of goods sold for its income statement.\r\n<h2>Periodic Inventory System<\/h2>\r\n<img class=\"alignright wp-image-4636 \" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/30184627\/dock-5061702_1920-1024x513.jpg\" alt=\"Shipping boxes at a harbor.\" width=\"399\" height=\"200\" \/>In a periodic system, the\u00a0Inventory account:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Has only the ending balance from the previous accounting year.<\/li>\r\n \t<li style=\"font-weight: 400;\">Excludes the cost of purchases, purchases returns and allowances, etc. since these are recorded in accounts such as Purchases, Purchases Returns and Allowances, Purchases Discounts, etc.<\/li>\r\n \t<li style=\"font-weight: 400;\">Must be adjusted at the end of the accounting year in order to report the costs actually in inventory.<\/li>\r\n \t<li style=\"font-weight: 400;\">Requires a physical inventory at least once per year and estimates within the year.<\/li>\r\n \t<li style=\"font-weight: 400;\">The periodic inventory system requires a calculation to determine the cost of goods sold.<\/li>\r\n<\/ul>\r\n<h2>Perpetual Inventory System<\/h2>\r\nIn a perpetual system, the Inventory account:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Is debited whenever there is a purchase of goods (there is no Purchases account).<\/li>\r\n \t<li style=\"font-weight: 400;\">Is credited for the cost of the items sold (and the account Cost of Goods Sold is debited).<\/li>\r\n \t<li style=\"font-weight: 400;\">Has a continuously or perpetually changing balance because of the above entries.<\/li>\r\n \t<li style=\"font-weight: 400;\">Requires a physical inventory to correct any errors in the Inventory account.<\/li>\r\n \t<li style=\"font-weight: 400;\">The cost of goods sold is readily available in the account Cost of Goods Sold.<\/li>\r\n<\/ul>\r\n<h3>Computing the Inventory under the Periodic Inventory Method<\/h3>\r\nAt the end of an accounting year, the company's ending inventory is normally computed based on a physical count of its inventory items. Inventory amounts for the monthly and quarterly financial statements are usually estimates.\r\n\r\nUnder the periodic inventory system, the cost of goods sold is computed as demonstrated with this example of the Geyer Co.:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement\"><caption>Geyer Co.\r\nIncome Statement (partial)\r\nFor the year ended December 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th scope=\"\">Sales Revenue, net<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$2,548,959<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cost of goods sold <\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">\u00a0 Merchandise inventory, January 1, 20XX<\/th>\r\n<td class=\"r\">$457,897<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">\u00a0 Purchases, net<\/th>\r\n<td class=\"r\">1,456,222<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">\u00a0 Freight in<\/th>\r\n<td class=\"r\">66,231<span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">\u00a0 Goods available for sale<\/th>\r\n<td class=\"line-single\"><\/td>\r\n<td class=\"r\">$1,980,350<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">\u00a0 Less merchandise inventory, December 31, 20XX<\/th>\r\n<td><\/td>\r\n<td class=\"r\">238,687<span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">\u00a0 Cost of goods sold<\/th>\r\n<td><\/td>\r\n<td class=\"line-single\"><\/td>\r\n<td class=\"r\">1,741,663<span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Gross profit<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\">$807,296<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Gross profit %<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>31.67%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nThe following formula is worth committing to memory:\r\n\r\n[latex]\\text{Beginning inventory}+\\text{Purchases}-\\text{Ending inventory}=\\text{Cost of goods sold}[\/latex]\r\n\r\nCompare the above calculation to one from the same company if it used the perpetual system where all transactions run through only two accounts: Merchandise Inventory and Cost of Goods Sold:\r\n<table class=\"fin-table acctstatement\"><caption>Geyer Co.\r\nIncome Statement (partial)\r\nFor the year ended December 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Sales Revenue, net<\/th>\r\n<td class=\"r\">$2,548,959<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Costs of goods sold<\/th>\r\n<td class=\"r\">1,741,663<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Gross profit<\/th>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$807,296<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"2\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Gross profit %<\/th>\r\n<td class=\"r\">31.67%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nCompanies using the periodic inventory system in their GL accounts often have sophisticated inventory systems outside of the GL for tracking the items they purchase, produce, sell, and have on hand.\r\n\r\n<section class=\"textbox keyTakeaway\" aria-label=\"Key Takeaway\">\r\n<h3>Periodic and Perpetual Inventory Systems<\/h3>\r\n<ul>\r\n \t<li>The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS).<\/li>\r\n \t<li>The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.<\/li>\r\n<\/ul>\r\n<\/section><section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25164[\/ohm2_question]\r\n[ohm_question hide_question_numbers=1]204489[\/ohm_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Compare and contrast periodic and perpetual inventory systems<\/li>\n<\/ul>\n<\/section>\n<p>One of the challenges of the periodic inventory method is making appropriate updates to the general ledger (GL). With a computerized perpetual inventory system, the GL is updated automatically, but the periodic system doesn\u2019t allow that.<\/p>\n<p>Rather than debiting Inventory, a company using periodic inventory debits a temporary account\u00a0called Purchases. Any adjustments related to these purchases of goods will later be credited to a GL\u00a0contra account such as Purchases Discounts or Purchases Returns and Allowances. When the balances of these three purchases accounts (Purchases, Purchase Discounts, and Purchase Returns and Allowances) are combined, the resulting amount is known as net purchases.<\/p>\n<p>When goods are sold under the periodic inventory system, there is no entry to credit the Inventory account or to debit the account Cost of Goods Sold. Hence, the Inventory account contains only the ending balance from the previous year. As a result, the company must compute an inventory amount at the end of each accounting period in order to report the amount of its ending inventory for its balance sheet and the cost of goods sold for its income statement.<\/p>\n<h2>Periodic Inventory System<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4636\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/30184627\/dock-5061702_1920-1024x513.jpg\" alt=\"Shipping boxes at a harbor.\" width=\"399\" height=\"200\" \/>In a periodic system, the\u00a0Inventory account:<\/p>\n<ul>\n<li style=\"font-weight: 400;\">Has only the ending balance from the previous accounting year.<\/li>\n<li style=\"font-weight: 400;\">Excludes the cost of purchases, purchases returns and allowances, etc. since these are recorded in accounts such as Purchases, Purchases Returns and Allowances, Purchases Discounts, etc.<\/li>\n<li style=\"font-weight: 400;\">Must be adjusted at the end of the accounting year in order to report the costs actually in inventory.<\/li>\n<li style=\"font-weight: 400;\">Requires a physical inventory at least once per year and estimates within the year.<\/li>\n<li style=\"font-weight: 400;\">The periodic inventory system requires a calculation to determine the cost of goods sold.<\/li>\n<\/ul>\n<h2>Perpetual Inventory System<\/h2>\n<p>In a perpetual system, the Inventory account:<\/p>\n<ul>\n<li style=\"font-weight: 400;\">Is debited whenever there is a purchase of goods (there is no Purchases account).<\/li>\n<li style=\"font-weight: 400;\">Is credited for the cost of the items sold (and the account Cost of Goods Sold is debited).<\/li>\n<li style=\"font-weight: 400;\">Has a continuously or perpetually changing balance because of the above entries.<\/li>\n<li style=\"font-weight: 400;\">Requires a physical inventory to correct any errors in the Inventory account.<\/li>\n<li style=\"font-weight: 400;\">The cost of goods sold is readily available in the account Cost of Goods Sold.<\/li>\n<\/ul>\n<h3>Computing the Inventory under the Periodic Inventory Method<\/h3>\n<p>At the end of an accounting year, the company&#8217;s ending inventory is normally computed based on a physical count of its inventory items. Inventory amounts for the monthly and quarterly financial statements are usually estimates.<\/p>\n<p>Under the periodic inventory system, the cost of goods sold is computed as demonstrated with this example of the Geyer Co.:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement\">\n<caption>Geyer Co.<br \/>\nIncome Statement (partial)<br \/>\nFor the year ended December 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th scope=\"\">Sales Revenue, net<\/th>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$2,548,959<\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Cost of goods sold <\/strong><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">\u00a0 Merchandise inventory, January 1, 20XX<\/th>\n<td class=\"r\">$457,897<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">\u00a0 Purchases, net<\/th>\n<td class=\"r\">1,456,222<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">\u00a0 Freight in<\/th>\n<td class=\"r\">66,231<span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">\u00a0 Goods available for sale<\/th>\n<td class=\"line-single\"><\/td>\n<td class=\"r\">$1,980,350<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">\u00a0 Less merchandise inventory, December 31, 20XX<\/th>\n<td><\/td>\n<td class=\"r\">238,687<span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">\u00a0 Cost of goods sold<\/th>\n<td><\/td>\n<td class=\"line-single\"><\/td>\n<td class=\"r\">1,741,663<span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Gross profit<\/th>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\">$807,296<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Gross profit %<\/th>\n<td><\/td>\n<td><\/td>\n<td>31.67%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>The following formula is worth committing to memory:<\/p>\n<p>[latex]\\text{Beginning inventory}+\\text{Purchases}-\\text{Ending inventory}=\\text{Cost of goods sold}[\/latex]<\/p>\n<p>Compare the above calculation to one from the same company if it used the perpetual system where all transactions run through only two accounts: Merchandise Inventory and Cost of Goods Sold:<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>Geyer Co.<br \/>\nIncome Statement (partial)<br \/>\nFor the year ended December 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th scope=\"row\">Sales Revenue, net<\/th>\n<td class=\"r\">$2,548,959<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Costs of goods sold<\/th>\n<td class=\"r\">1,741,663<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Gross profit<\/th>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$807,296<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"2\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Gross profit %<\/th>\n<td class=\"r\">31.67%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Companies using the periodic inventory system in their GL accounts often have sophisticated inventory systems outside of the GL for tracking the items they purchase, produce, sell, and have on hand.<\/p>\n<section class=\"textbox keyTakeaway\" aria-label=\"Key Takeaway\">\n<h3>Periodic and Perpetual Inventory Systems<\/h3>\n<ul>\n<li>The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold (COGS).<\/li>\n<li>The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.<\/li>\n<\/ul>\n<\/section>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25164\" class=\"resizable\" 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