What is Periodic inventory system

As we have discussed in the previous session, in order to prepare a
 statement of comprehensive income we have to calculate gross profit, 
which requires the calculation of the cost of sales figures.

There are two methods for the recording of inventory so as to allow the
 calculation of the cost of sales:-

1. Perpetual inventory system what is a perpetual inventory system

perpetual inventory system general entries

2. Periodic Inventory system

Here in this session, we will analyze what is a periodic inventory system.

Periodic Inventory system

The period inventory system is also known as a Period end system.

Under the periodic inventory system, two ledger accounts are used 

1. Purchase account which is used to record all purchases during the 
   year 
2. Inventory account which is used to record the value of inventory at
    the beginning of the financial year 

Under the periodic inventory system, Inventory balance and COGS are 
not updated after every sale and are calculated at the year-end hence no
 COGS is maintained in trial Balance during the year. A separate account 
for opening stock, Purchases, Return outward and carriage inward for
 accumulating the cost of inventory is maintained.

Physical counting is performed to determine closing stock, the amount 
of closing stock is determined and the remaining amount is COGS.

Periodic inventory system general entry

In periodic inventory system Quantity schedule is used

Example:- Following is an example of Quantity schedule

Description	Units	Rates	Amount
opening	400	6.25	2500
purchases	300	6.50	1950
purchases	200	6.75	1350
purchases	500	6.8	3400
purchases	300	7.00	2100
Available for sale	1700		11300 (Total)
Sold	(1200)
Closing stock	500

SOLUTION VIA FIFO METHOD:-

Closing stock

                

300	@ 7.00	2100
200	@6.80	1360

TOTAL=3460

COGS:-

OPENING INVENTORY	2500
PURCHASES	8800
AVAILABLE	11300
CLOSINGSTOCK	(3460)
COGS	7,840

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Perpetual inventory system general entries

DESCRIPTION	DEBT	CREDIT
PURCHASE OF  INVENTORY	Inventory	Accounts payable /cash
INCURRED  TRANSPORTATION  COST	Inventory	Cash
RETURNED  GOODS TO  SUPPLIER	Accounts payable/cash	Inventory
SOLD GOODS	Cash/Accounts  receivable	Sales
SOLD  GOODS	Cost of goods sold	Inventory
GOODS  RETURNED BY  CUSTOMER	Return inward	Cash/ Accounts  receivable
GOODS  RETURNED BY  CUSTOMER	Inventory	Cost of goods sold
ENDING INVENTORY	None	None
NRV ADJUSTMENT	Cost of goods sold	Inventory
NORMAL LOSS  OF STOCK	Cost of goods sold	Inventory
ABNORMAL LOSS  OF STOCK	Stock loss	Inventory
GOODS USED  AS ADVERTISEMENT MATERIAL OR DONATED	Advertisement/Donation	Inventory
GOODS  WITHDRAWN	Drawings	Inventory

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PERPETUAL INVENTORY SYSTEM VS PERIODIC INVENTORY SYSTEM

PERPETUAL INVENTORY SYSTEM 
VS PERIODIC INVENTORY SYSTEM

In order to calculate gross profit, it is necessary to record opening inventory, 
closing stock and purchases.

There are two basic types of inventory systems which are used for the 
recording of inventory 

1)Perpetual inventory system 

2)Periodic inventory system(Period end system)

Perpetual inventory system definition:-

Under a perpetual inventory system, a single account is used to record 
the movement of all inventory items.It is a system where inventory records 

Are continuously upgraded after every transaction.

The two basic components which are recorded by such system

Is that it maintains the record of purchases at the moment

Purchase is made and secondly, it records all issues out

Of inventory.

All the transactions involving the receipt or issue of inventory

 must be recorded, and at any time, the balance on

 the inventory account should be the value of 

inventory currently held.

Under a perpetual inventory system, all receipts of

 items is recorded at cost and all issues of inventory to the cost of sales.

What is inventory or bin card?

Under the perpetual inventory system Inventory card or Bin card
 is used for the purpose of recording the inventory items.

The inventory or bin card is maintained for each item receipts and issued
 during the year on a timely basis.

FOLLOWING IS BRIEF EXAMPLE OF INVENTORY OR Bin card

	RECEIPTS	ISSUES	BALANCE
JUL14 PURCHASES	1000 UNITS		1000 UNITS
JUL25 ISSUE		200 UNITS	(200) 800 UNITS
SEPT5		100 UNITS	(100) 700 UNITS
NOV15	1000 UNITS	300 UNITS	TOTAL 700 UNITS STOCK REMAINING

What is an INVENTORY count?

An inventory count is a physical verification of the quantity of inventory
 that a business has in its stock.

Inventory count is performed both in perpetual and 
periodic inventory systems. In perpetual inventory system inventory 
the count is performed in order to check the closing stock however under 
periodic inventory system inventory count is performed to determine
 the closing stock.

What causes the difference between physical inventory counted 
and balance on the inventory account?

There might be several reasons for such difference however few are 
listed below:-

1. Failure to record a receipt
2. Failure to record an issue
3. Damaged inventory not recorded
4. wrong posting of inventory receipts
5. Inventory was stolen

When to perform INVENTORY count?

The prescribed time to do INVENTORY count is the reporting date
 however in some case this might not be possible due to shortage of staff 
or any other unforeseen contingency

POINT TO PONDER:-

If the inventory count is performed on another date other than the
 reporting date then the balance must be adjusted for the transaction 
between the two dates.

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