LO8-1
Perpetual Inventory System
• Continually adjusted for each change in inventory
– Caused by:
• A purchase
• A sale, or
• A return of merchandise by the company to its
supplier
• Cost of goods sold account is adjusted each time
goods are sold or are returned by a customer
• Designed to track inventory quantities from their
acquisition to their sale
• Allows management to:
– Determine goods on hand on any date
– Determine the number of items sold during a period
LO8-1
Illustration: Perpetual Inventory System
The Lothridge Wholesale Beverage Company purchases soft drinks
from producers and then sells them to retailers. The company begins
2016 with merchandise inventory of $120,000 on hand. During 2016
additional merchandise is purchased on account at a cost of $600,000.
Sales for the year, all on account, totaled $820,000. The cost of the soft
drinks sold is $540,000. Lothridge uses the perpetual inventory system
to keep track of both inventory quantities and inventory costs. The
system indicates that the cost of inventory on hand at the end of the
year is $180,000.
Journal Entry-2016
Inventory
Accounts payable
Debit
Credit
600,000
600,000
LO8-1
Illustration: Perpetual Inventory System (continued)
The Lothridge Wholesale Beverage Company purchases soft drinks
from producers and then sells them to retailers. The company begins
2016 with merchandise inventory of $120,000 on hand. During 2016
additional merchandise is purchased on account at a cost of $600,000.
Sales for the year, all on account, totaled $820,000. The cost of the soft
drinks sold is $540,000. Lothridge uses the perpetual inventory system
to keep track of both inventory quantities and inventory costs. The
system indicates that the cost of inventory on hand at the end of the
year is $180,000.
Journal Entry-2016
Debit
Accounts receivable
Sales revenue
820,000
Cost of goods sold
Inventory
540,000
Credit
820,000
540,000
LO8-1
Periodic Inventory System
• Adjusts inventory and records cost of goods sold
only at the end of each reporting period
• Records merchandise purchases, purchase returns,
purchase discounts, and freight-in in temporary
accounts
• Determines period’s cost of goods sold by
combining temporary accounts with the inventory
account:
Cost of
=
goods sold
Beginning
inventory
Net
+
purchases
Ending
–
inventory
LO8-1
Illustration: Periodic Inventory System
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers. The
company begins 2016 with merchandise inventory of $120,000
on hand. During 2016, additional merchandise was purchased
on account at a cost of $600,000. Sales for the year, all on
account, totaled $820,000. Lothridge uses a periodic inventory
system. A physical count determined the cost of inventory at
the end of the year to be $180,000.
Journal Entry-2016
Inventory
Accounts payable
Debit
Credit
600,000
600,000
LO8-1
Illustration: Periodic Inventory System (continued)
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers. The
company begins 2016 with merchandise inventory of $120,000
on hand. During 2016, additional merchandise was purchased
on account at a cost of $600,000. Sales for the year, all on
account, totaled $820,000. Lothridge uses a periodic inventory
system. A physical count determined the cost of inventory at
the end of the year to be $180,000.
Journal Entry-2016
Accounts receivable
Sales revenue
Debit
Credit
820,000
No entry is recorded for the cost of inventory sold.
820,000
LO8-1
Illustration: Cost of Goods Sold
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers. The
company begins 2016 with merchandise inventory of $120,000
on hand. During 2016, additional merchandise was purchased
on account at a cost of $600,000. Sales for the year, all on
account, totaled $820,000. Lothridge uses a periodic inventory
system. A physical count determined the cost of inventory at
the end of the year to be $180,000.
Beginning
inventory
+
Net
purchases
–
Ending
inventory
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
=
Cost of
goods sold
$120,000
600,000
720,000
(180,000)
$540,000
LO8-1
Illustration: Cost of Goods Sold (continued)
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Journal Entry-December 31, 2016
Cost of goods sold
Inventory (ending)
Inventory (beginning)
Purchases
$120,000
600,000
720,000
(180,000)
$540,000
Debit
Credit
540,000
180,000
120,000
600,000
Concept Check √
The Golson Company uses the periodic inventory system. Information for
2016 is as follows:
Sales
$1,325,000
Beginning inventory
340,000
Purchases
600,000
Purchase returns
6,000
Ending inventory
370,000
Golson's cost of goods sold for 2016 is:
a. $761,000.
b. $594,000.
c. $570,000.
$340,000 (beginning inventory) + $600,000 (purchases) d. $564,000.
$6,000 (purchase returns) - $370,000 (ending inventory) =
$564,000
LO8-3
Illustration: Inventory Transactions—Perpetual
and Periodic Systems (continued)
$ in 000s
Perpetual System
Inventory
Accounts payable
Periodic System
588
Inventory
Cash
16
Accounts payable
Inventory
20
Accounts receivable
Sales revenue
830
Cost of goods sold
Inventory
550
Purchases
Purchases
588
Accounts payable
Freight
Freight-in
16
Cash
Returns
Accounts payable
20
Purchase returns
Sales
Accounts receivable
830
Sales revenue
No entry
550
588
588
16
16
20
20
830
830
LO8-3
Illustration: Inventory Transactions—Perpetual
and Periodic Systems (continued)
$ in 000s
Perpetual System
Periodic System
End of the period
No entry
Cost of goods sold
Inventory (ending)
Purchase returns
Inventory (beginning)
550
154
20
Purchases
Freight-in
Supporting Schedule: Cost of goods sold
Beginning inventory
$120,000
584,000
Plus: Net Purchases ($588–20+16)
704,000
Cost of goods available
(154,000)
Less: Ending inventory
$550,000
Cost of goods sold
120
588
16