Periodic and perpetual inventory system journal entries
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Businesses can choose to use either a perpetual period periodic inventory system to calculate their cost of goods sold (COGS). A periodic inventory system calculates the COGS following a physical inventory count at period-end, whereas a perpetual inventory system calculates the COGS after each sale. Show
Most businesses would love to have updated inventory and COGS balances provided with a perpetual inventory system. However, constraints like difficulty in maintaining records and the need for powerful accounting software hinder some small businesses from using the perpetual inventory system. As discussed below, the accounting in a periodic inventory system is far simpler than a perpetual inventory system. Inventory system vs cost flow assumption: Perpetual and periodic are inventory systems that determine when you calculate COGS. Cost flow assumptions like last-in, first-out (LIFO), first-in, first-out (FIFO), and average cost determine how you allocate costs among identical units of inventory. Companies must choose both an inventory system and a cost flow assumption. Perpetual Inventory Is Better For
Periodic Inventory Is Better For
Perpetual vs Periodic Inventory at a GlanceIn the following section, we’ll illustrate the difference between the periodic inventory system and perpetual inventory system by showing the journal entries while using the FIFO cost flow assumption. You can visit our in-depth analysis of the average cost method and LIFO method to see how they’re implemented with both periodic and perpetual systems. Periodic Inventory Details and FeaturesThe periodic inventory system is the easiest system to implement for small businesses. It doesn’t require constant recordkeeping and it makes everyday transactions easier, making it great for self-employed individuals and solopreneurs. Here are the key features of a periodic system:
Pros and Cons of the Periodic Inventory SystemPeriodic Inventory System Journal EntriesThe periodic and perpetual inventory systems require different journal entries. Let’s first go over the periodic method journal entries then segue into the perpetual inventory system afterward. In our illustration, let’s use sample data from a fictitious company called FitTees. FitTees, a ready-to-wear clothing store in New York, uses the FIFO method of costing inventory. On its December 31, 2021, balance sheet, it reported merchandise inventory of $4,958. The details of the a merchandise inventory account are presented in the inventory quantity report as of January 1, 2022: Recording Cash PurchasesOn January 2, FitTees purchased 2,000 units of designer shirts from a new supplier, FRESH Distributors, Inc. for cash at $20 per unit. Recording Purchases on AccountOn January 3, FitTees purchased 2,000 units of jeans at $23 per unit from SMRE Company on account, meaning they can pay the invoice later, say 30 days. We record this transaction as follows: Recording Cash SalesFitTees sold 700 units of designer shirts and 900 units of jeans at $39 each. All of these are cash sales. Since we are using the periodic system, we don’t make a journal entry to record the COGS. Recording Sales on AccountFitTees sold 1,200 units of designer shirts and 800 units of jeans at $35 each to WP Clothing, a reseller in California. Physical CountFitTees conducts a monthly physical count to determine existing goods on hand. During the physical count, FitTees found that there are 225 units of designer shirts and 354 units of jeans on hand. At the count date, the remaining units on hand for designer shirts cost $20 and $23 for jeans. Since we’re using the FIFO method, the first units purchased are the first units sold. Therefore, the units in ending inventory are the most recent units purchased. In the periodic inventory system, we need to update our inventory records after the physical count. But first, let’s compute the COGS by using the COGS formula: The journal entries to adjust our records are as follows: Perpetual Inventory Details and FeaturesIn a perpetual inventory system, we keep subsidiary ledger records for every item of inventory. The major benefit of having multiple ledgers is that you can keep track of inventory balances and COGS throughout the year. Moreover, you aren’t required to perform frequent inventory counts because perpetual records always provide the latest information. Pros and Cons of the Perpetual Inventory SystemTo illustrate the perpetual system, let’s use the same data from FitTees. Recording Cash PurchasesOn January 2, FitTees purchased 2,000 units of designer shirts from a new supplier, FRESH Distributors, Inc. for cash worth at $20 per unit. Notice that in the perpetual inventory system, we directly record our purchases in the inventory account rather than the COGS – Purchases account. Recording Purchases on AccountOn January 3, FitTees purchased 2,000 units of jeans at $23 per unit from SMRE Company on account, meaning they can pay the invoice later, say 30 days. We record this transaction as follows: Recording Cash SalesFitTees sold 700 units of designer shirts and 900 units of jeans at $39 each. All of these are cash sales. The total COGS under the FIFO method is $35,916. In the perpetual system, we need to record the COGS at the same time as we record the sale. The entry highlighted depicts the costs transferred from inventory to COGS. This entry must be made every time there is a sale, which is why the perpetual system should only be used with accounting software that will make the necessary calculations. Recording Sales on AccountFitTees sold 1,200 units of designer shirts and 800 units of jeans at $35 each to WP Clothing, a reseller in California. The COGS under the FIFO method is $42,400 View COGS and InventoryIn a perpetual inventory system, we always update our COGS account with every transaction. Therefore, there’s no adjusting journal entry at the end of the period. Our COGS and Inventory under the perpetual method are determined by the journal entries already made. Bottom LineThe choice between perpetual and periodic inventory systems depends on the size, complexity, and nature of your small business. Even if you’re a small business, that doesn’t mean that the perpetual inventory system isn’t beneficial to you. In choosing an inventory system, you have to weigh the costs and benefits. As long as the benefits exceed the cost, you can use any of the two inventory systems. What is the journal entry for periodic inventory system?Examples of Periodic Transaction Journal Entries. In a periodic inventory system, you update the inventory balance once a period. Typical journal entries for this system are simple. You can assume that both the sales and the purchases are on credit and that you are using the gross profit to record discounts.
What is the journal entry for perpetual inventory system?In a perpetual system, two journal entries are required when a business makes a sale: one to record the sale and one to record the cost of the sale.
What is the difference between perpetual and periodic journal entries?The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold. The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.
What are the differences between the journal entries for periodic inventory system and perpetual inventory system?Under the periodic system, the inventory and cost of goods sold accounts are updated only periodically, but under the perpetual system, entries that recognize a transaction's effect on these accounts occur when the revenue from the sale is recognized.
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