7. Gr 11 Accounting - Inventories - Theory Presentation

Summary

This educational video script delves into the differences between perpetual and periodic inventory systems, focusing on their impact on financial record-keeping and decision-making. It highlights the importance of understanding inventory movements, cost of sales, and gross profit calculations, which are crucial for business performance evaluation. The script also emphasizes the need to distinguish between various inventory-related costs and how they are accounted for in each system, setting a foundation for further study in grade 12.

Takeaways

• 📈 The video focuses on the theory of inventory systems, specifically comparing Perpetual (continuous) and Periodic inventory systems.
• 📑 Under a Perpetual inventory system, all movements of trading stock are recorded, providing real-time data on stock levels and sales.
• 🛒 In a Perpetual system, the inventory quantities are updated after each transaction, allowing for precise tracking of items sold and remaining stock.
• 📚 For Periodic inventory systems, updates occur at the end of the accounting period with a physical count, which is necessary to determine remaining stock.
• 🔢 The script emphasizes the importance of understanding the differences between Perpetual and Periodic systems for financial analysis and decision-making.
• 💡 Key financial indicators discussed include cost of sales, gross profit, stock holding period, and stock turnover rate.
• 📋 The opening stock is the unsold stock from the previous financial year and is considered an expense in a Periodic inventory system.
• 🛍️ Purchases of stock during the year are also considered an expense, whether paid for in cash or on credit.
• 🚚 Additional costs such as Carriage on purchases, import duties, and other expenses related to acquiring trading stock must be accounted for separately.
• 🧾 In a Periodic system, the trading stock account only records opening and closing stock, with all other transactions affecting the purchase account.
• ⚖️ Cost of sales can be calculated by adding opening stock, purchases, Carriage on purchases, and other costs, then subtracting the closing stock.
• 📘 The video script lays a foundation for further study in inventory systems, particularly in evaluating stock within the two systems, which is crucial for Grade 12 studies.

Q & A

What is the primary difference between a Perpetual and a Periodic inventory system?

The primary difference lies in the timing of inventory updates. In a Perpetual inventory system, inventory quantities are updated after each transaction, allowing for real-time tracking of items sold and remaining. In contrast, a Periodic inventory system updates inventory quantities only at the end of the accounting period, requiring a physical count to determine the remaining stock.

How does a Perpetual inventory system record the movement of trading stock?

A Perpetual inventory system records all movements of trading stock in the trading stock account, which allows for the immediate reflection of sales and the remaining stock without the need for a physical count.

What is the significance of understanding the difference between Carriage on purchases and Carriage on sales in inventory management?

Understanding the difference is crucial because Carriage on purchases is an expense related to the cost of acquiring inventory and is recorded in the purchase account, while Carriage on sales is an expense related to delivering goods to customers and is recorded separately in the profit and loss account. They affect the business's financial statements differently.

What are some examples of additional costs that might be associated with acquiring trading stock?

Examples of additional costs include import duties, freight, harbor dues, and any other costs incurred in getting the trading stock before it is added to the inventory.

How is the cost of sales calculated in a trading account?

The cost of sales is calculated by adding the opening stock, purchases, Carriage on purchases, and any other additional costs, then subtracting the closing stock from this total.

What is the role of opening stock in the context of inventory management?

Opening stock represents the unsold stock from the previous financial year and is the stock balance at the beginning of the financial year. It is considered an expense to the business, especially in a Periodic inventory system.

How does the purchase of stock affect the trading stock account in a Periodic inventory system?

In a Periodic inventory system, the purchase of stock, whether paid for in cash or on credit, is recorded in the purchase account rather than the trading stock account. The trading stock account only records the opening stock and the closing stock after the physical count.

What is the purpose of calculating the cost of sales?

Calculating the cost of sales is essential for determining the gross profit and for financial reporting. It helps businesses understand the cost associated with producing or purchasing the goods they sell.

What is the relationship between sales and cost of sales in calculating gross profit?

Gross profit is calculated by subtracting the cost of sales from the total sales. It indicates how much profit is made from sales after covering the direct costs of the goods sold.

Why is it important for students to understand both inventory systems when preparing for exams?

Understanding both inventory systems is important because it provides a solid foundation for more advanced studies in grade 12 and helps students to be prepared for various problem-solving questions and scenarios they may encounter in exams.

What are some financial indicators that can be derived from inventory management?

Financial indicators derived from inventory management include the cost of sales, gross profit, stock holding period, and stock turnover rate, which help in evaluating the efficiency of inventory management and the financial health of the business.

Outlines

00:00

📈 Perpetual vs. Periodic Inventory Systems

This paragraph introduces the two main inventory systems: Perpetual and Periodic. It explains that under a Perpetual system, every movement of trading stock is recorded, allowing for real-time tracking of stock levels and sales. In contrast, a Periodic system updates inventory quantities only at the end of a period through physical count. The paragraph emphasizes the importance of understanding these systems for financial analysis, including calculating cost of sales and gross profit, and preparing trading accounts. It also highlights the need to distinguish between the two systems when evaluating stock and financial indicators.

05:02

🔍 Detailed Analysis of Periodic Inventory System

The second paragraph delves deeper into the Periodic inventory system, discussing the accounting treatment of various transactions related to trading stock. It explains that the trading stock account only records opening and closing stock, with all other costs such as purchases, carriage on purchases, and import duties being recorded in separate expense accounts. The paragraph outlines the process of calculating cost of sales, emphasizing that it involves adding opening stock, purchases, carriage on purchases, and other costs, then subtracting the closing stock. It also clarifies that cost of sales can be derived from the trading account by subtracting gross profit from sales, ensuring that learners understand the different methods of calculation.

10:03

📚 Importance of Understanding Inventory Systems in Education

The final paragraph stresses the significance of grasping the concepts of inventory systems, especially as students progress to higher grades where these systems become more complex. It mentions that the foundation laid in grade 11 is crucial for understanding more advanced topics in grade 12. The paragraph encourages students to practice problem-solving questions related to inventory systems, as these are likely to appear in exams. The speaker wishes the students a wonderful day, indicating the end of the discussion on inventory systems.

Keywords

💡Perpetual Inventory System

A Perpetual Inventory System is a method of inventory tracking where every transaction affecting stock levels is recorded in real time. This allows the business to have a continuous and up-to-date record of inventory. In the video, it's highlighted as a system where all movements of trading stock are recorded, providing an exact number of items sold and remaining, which is crucial for understanding the operational efficiency and stock management.

💡Continuous Inventory System

This term is synonymous with the Perpetual Inventory System. It emphasizes the ongoing nature of inventory tracking without the need for periodic stock counts. The video script uses this term to explain the system where inventory quantities are updated after each transaction, allowing for precise tracking of sales and remaining stock.

💡Periodic Inventory System

This system updates inventory quantities only at the end of a specific accounting period, typically through a physical count of the remaining stock. The video script contrasts this with the Perpetual Inventory System, pointing out that it does not track sales in real time and requires a physical stock count to determine the quantity of items left over.

💡Trading Stock Account

In the context of inventory management, the Trading Stock Account is used to record the value of goods held for sale. The video explains that in a Perpetual Inventory System, this account is updated with every sale and purchase, showing the business when items are sold and the exact amount remaining.

💡Cost of Sales

Cost of Sales refers to the total cost of the goods sold by a company during a specific period. The video script details how this is calculated in both inventory systems, emphasizing its importance in determining the gross profit and evaluating the financial performance of the business.

💡Gross Profit

Gross Profit is the profit a company makes after deducting the cost of sales from its revenue. The video script explains that it can be calculated by subtracting the cost of sales from total sales, and it is an important financial indicator of a company's profitability.

💡Stock Holding Period

The Stock Holding Period is the average time it takes for a company to sell its inventory. The video script suggests that this metric is important for evaluating inventory turnover and understanding how efficiently a company manages its stock.

💡Stock Turnover Rate

Stock Turnover Rate is a financial metric that shows how many times a company's inventory is sold and replaced over a period. The video script mentions this rate as a key performance indicator for inventory management, reflecting the efficiency of stock sales.

💡Opening Stock

Opening Stock refers to the inventory of goods that a business has at the beginning of an accounting period. The video script explains that it is considered an expense when using a Periodic Inventory System and is crucial for calculating the cost of sales.

💡Closing Stock

Closing Stock is the inventory of goods that a business has at the end of an accounting period. The video script describes how it is determined through a physical count in a Periodic Inventory System and is used to calculate the cost of sales.

💡Carriage on Purchases

Carriage on Purchases is the cost of transporting goods from the supplier to the business. The video script clarifies that this is an expense to the business and should not be confused with Carriage on Sales, which is related to delivering goods to customers.

Highlights

Focus on the theory of inventory systems, specifically Perpetual or continuous inventory systems covered in grade 10.

All movements of trading stock are recorded in a Perpetual inventory system, allowing for real-time tracking of stock levels.

The difference between Perpetual and periodic inventory systems is that the latter updates inventory quantities only at the end of the period.

In a periodic system, physical inventory count is necessary to determine remaining stock, unlike the Perpetual system.

Financial indicators such as cost of sales, gross profit, and stock turnover rate are calculated differently in each system.

Understanding the opening stock, which is the unsold stock from the previous financial year, is crucial for inventory accounting.

Purchase of stock during the year is considered an expense and is recorded differently in each inventory system.

Carriage on purchases is an expense to the business and should not be confused with Carriage on sales.

Closing stock in a periodic system is determined by physical count at the end of the accounting period.

The trading stock account in a periodic system only records opening stock and closing stock, excluding other transactions.

Cost of sales can be calculated by adding opening stock, purchases, Carriage on purchases, and other additional costs, then subtracting closing stock.

An alternative method to calculate cost of sales is by subtracting gross profit from sales.

The trading stock account in a Perpetual system records all movements, including purchases and transport costs.

In a Perpetual system, additional costs like import duties are recorded as separate expense accounts.

At the end of the accounting period, all expense accounts are closed off to the trading account in both inventory systems.

The trading account format includes sales, opening stock, purchases, Carriage on purchases, and closing stock to calculate cost of sales.

Understanding the differences between inventory systems is essential for evaluating stock and preparing for grade 12 studies.

Practice problem-solving questions related to inventory systems to prepare for exams, as they form part of the curriculum.

Transcripts

we're going to focus in this video a

little bit on the theory now when you've

done Activity one Activity one the focus

was under Perpetual or continuous

inventory system so basically it's work

that you've covered in grade 10. if we

just go back and what if we've done if

you look at this type of system

all movement of trading stock is

recorded if you look at the first one we

started with two items then more were

purchased so now it means currently

we've got an idea but what is our total

purchases this is the number that we

sold so we know exactly how much is left

over again this is because all movement

of trading stock is recorded in the

trading stock account we show when items

are sold

if we look at the difference between the

two systems and this is very important

to understand with a Perpetual or in

continuous inventory system inventory

quantities are updated after each

transaction we know exactly how many

items were sold we know exactly how many

items are left over

whereas if we're looking at a periodic

inventory system

inventory quantities are updated at the

end of the period taking physical

inventory count so we have to literally

take a physical stock down to see how

much do we have left over we do not

track exactly how many time how many

items were sold we do not know how many

items are left until we count the

closing inventory so this is the

difference between the two systems now

when we're looking at inventories this

forms part of your paper too the

periodic and Perpetual inventory systems

Concepts recording and control so your

typical type of questions which you can

expect is calculating cost of sales

calculating the gross profit prepare the

trading account you will get problem

solving types of question

calculate a stock holding period the

stock turnover rate

calculating

how have we achieved our aimed markup so

looking at these we're looking at

Financial indicators

what is the difference between a

periodic and a Perpetual inventory

system now these are just an idea of the

types of questions that you can expect

when we're looking at inventories

what is very important to understand is

for Concepts make sure that you know

what is your opening stock when we're

talking about our opening stock it is

unsold stock from the previous Financial

year it's the stock balance in the

beginning of the financial year opening

stock is an expense to the business when

we're using an periodic inventory system

when we're looking at the purchase of

stock it's stock bought during the year

stock can be purchased cash or uncredit

it's regarded as an expense now any

other cost

in getting the trading stock

we need to open an expense account for

that when we're looking at transporting

goods getting that Goods to us it means

Carriage on purchases

that is an expense to the business do

not confuse Carriage on purchases with

Carriage on sales Carriage on sales is

deliveries to customers it's also an

expense to the business but it has

nothing to do with calculating the cost

of sales

this is regarded as a

expense which will appear in your profit

and loss account remember its deliveries

to customers

returns of stock if stock is sent back

to our suppliers

it will decrease my expense

which means in a periodic inventory

system the purchase account will

decrease

closing stock is what we have physically

counted what is left over at the end of

the accounting period

in a periodic system we still going to

have the trading stock account but the

only thing that will appear in there is

my opening stock and my closing stock

if we look now at the later accounts as

I've just mentioned in my trading stock

it is a current asset the opening

balance the balance in the beginning is

going to be taken to your opening stock

which is an expense to the business the

end of the accounting period we do a

physical stock count that is called your

closing stock

if we look now at all the expenses

trading stock nothing is recorded in the

trading stock account except opening

stock and closing stock so it means when

we're buying trading stock cash or

credit that goes to the purchase account

when stock is donated when stock is

taken for personal use any movement with

regards to our trading stock will now go

into the purchase account

if we have to try pay for transport cash

or credit it means we now need to open

up an expense account which is Carriage

on purchase if we have to pay for import

duties in getting that trading stock

before it would have been added to the

trading stock account if we use a

Perpetual or continuous inventory system

but now we need to open an expense

account import duties and it will be the

same for any other cost

like custom duties Freight Harbor dues

any other cost now these are all expense

accounts and you've learned in the

nominal account section the end of the

accounting period everything is closed

off

this is an expense but it does not form

part of your operating expenses this

will always be closed off to your

trading account

so you can study in your trading account

we would always have sales

but the first closing transfer debtors

allowances is closed off to sales

we would always have our opening stock

plus purchases plus carry charm

purchases plus any other additional cost

like custom duty minus the closing stock

and there's a particular reason why I've

mentioned it in this way now this is how

we calculate our cost of sales you need

to know how to calculate your cost of

sales using this format this calculation

and by calculating it from the trading

account from the trading account cost of

sales can also be calculated by taking

your sales

minus the gross profit equals cost of

sales take note it will give you exactly

the same answer so to calculate your

cost of sales it's always your opening

stock plus purchases plus Carriage on

purchases plus any other additional cost

equals cost of stock available for sale

minus your closing stock equals your

cost of sales

refer now to Activity one which we've

completed this is just to give you an

illustration of what will happen

every single time when stock was

purchased cash or on credit we would

have shown it in our trading stock

account now the trading stock account

will be replaced

by the purchase account

if we needed to pay for transport in

getting that training stock from the

suppliers to us it means that trading

stock will now be replaced by Carriage

on purchase

are selling Goods if customers returns

Goods to us there's no cost of sales so

now you can leave it out

Learners staying during grade eight and

nine or Grade 9 specifically when we

first start with these transactions

always they always forget for cost of

sales now in a periodic inventory system

you may leave out the cost of sales

cost of sales is only calculated at the

end but I've mentioned just a minute ago

to calculate your cost of sales opening

stock plus purchases plus Carriage on

purchases plus any other additional cost

equals cost of stock available for sale

minus your closing stock equals cost of

sales another way in calculating it from

your trading account take the sales

minus the gross profit so make sure that

you understand the difference between

the two inventory systems and this is so

important because in grade 12 we also

doing inventory systems but adding to

that Within These two systems there's

different ways in which we evaluate our

stock so the foundation is now laid in

grade 11. again make sure that you

understand the difference between the

two inventory systems

from activity to onwards we are going to

look at only periodic inventory system

and you will see the last activity we

are going to look at problem solving

types of questions

you need to make sure that you practice

those type of questions

because that is what you can expect in

paper two

hope you have a wonderful day