Grade 11 Accounting Term 3 | Inventory System | Part 1 of 2024

Summary

This video tutorial introduces the concept of inventory systems, focusing on two main types: periodic and perpetual, and their applications in small and large businesses, respectively. It explains the differences in recording inventory, cost of sales treatment, and the manual versus automated processes. The script also provides a practical example of calculating total purchases and drafting a trading account for a small business using a periodic inventory system, offering insights into the accounting process and study resources for further learning.

Takeaways

• 📚 The video introduces an inventory system, a topic in accounting that includes cash budgeting and cost accounting, specifically for manufacturing.
• 📈 There are two main inventory systems discussed: the Periodic Inventory System and the Perpetual Inventory System.
• 🏪 Periodic Inventory System is typically used by small businesses like a P shop, which does not use computers or software to track inventory.
• 💻 Perpetual Inventory System is used by larger companies that have the resources for computer systems or software to continuously record inventory transactions.
• 📝 The main difference between the two systems is the method of recording inventory: manual in the case of the Periodic system, and automated with computers for the Perpetual system.
• 🛒 The treatment of cost of sales differs, with the Perpetual system recording it at the point of sale, while the Periodic system calculates it at year-end using a specific formula.
• 🔢 The formula for calculating cost of sales in a Periodic system is: Opening Stock + Purchases - Returns - Closing Stock.
• 🛍️ The video provides an example of a small business owner, Zakum, who uses a Periodic Inventory System, likely due to the lack of computers and the nature of being a small operation.
• 🧮 The script includes a detailed example of calculating total purchases for a business, including various transactions and adjustments.
• 📊 The video also covers how to draft a trading account in the ledger, which is part of the accounting process for recording financial transactions.
• 📘 Additional resources such as extra classes and study guides for accounting are mentioned, highlighting the importance of preparation for exams.
• 📝 The trading account format is consistent and includes sales, cost of sales, and gross profit, serving as an income statement for the business.

Q & A

What is the main topic of the video?

The main topic of the video is the inventory system, specifically discussing the two types of inventory systems used in accounting: periodic and perpetual.

What is an inventory system in accounting?

An inventory system in accounting is a method used to record and track the stock or inventory of a business.

What are the two types of inventory systems mentioned in the video?

The two types of inventory systems mentioned are the periodic inventory system and the perpetual inventory system.

Which type of business typically uses a periodic inventory system?

Small businesses typically use a periodic inventory system, such as a small shop or store.

What is the main difference between the periodic and perpetual inventory systems?

The main difference is that the perpetual inventory system uses computers or software to continuously record inventory transactions, while the periodic inventory system relies on manual recording, often at the end of the year.

How is the cost of sales recorded in a perpetual inventory system?

In a perpetual inventory system, the cost of sales is recorded at the point of sale, using computer software to track the transaction.

How is the cost of sales calculated in a periodic inventory system?

In a periodic inventory system, the cost of sales is calculated using a formula that involves opening stock, purchases, and returns, and it is typically done at the year-end after a physical stock count.

Why might a small business owner choose to use a periodic inventory system instead of a perpetual one?

A small business owner might choose a periodic inventory system because they do not have computers or software, or because the cost of purchasing and maintaining such technology is not financially viable for their small scale of operation.

What is the purpose of a trading account in accounting?

A trading account in accounting is used to summarize the revenue, cost of sales, and gross profit of a business over a specific period, typically a financial year.

What additional service is being offered for accounting students in the video?

The video mentions an extra class service for accounting students, available at a cost of 100 per month, which includes twice-weekly sessions to cover various question papers in preparation for exams.

What is the significance of the study guide mentioned in the video for grade 11 accounting students?

The study guide for grade 11 accounting students is a resource that has been completed after thorough editing and rechecking to help students practice and prepare for their tests, and it is available as a soft copy in PDF format.

Outlines

00:00

📚 Introduction to Inventory Systems

The video script introduces the concept of inventory systems, a key topic in accounting. It distinguishes between two types of inventory systems: the periodic inventory system, typically used by small businesses due to its simplicity and lack of requirement for computer systems, and the perpetual inventory system, preferred by larger companies that utilize computers or software to track inventory in real-time. The script emphasizes the importance of understanding these systems to analyze a given question paper on the topic.

05:02

🔍 Differences Between Inventory Systems

This paragraph delves into the differences between the two inventory systems. The periodic system records cost of sales at the year's end using a manual formula, which involves calculating the cost of sales based on opening stock, purchases, and returns. In contrast, the perpetual system uses computer software to record cost of sales at the point of sale, eliminating the need for year-end calculations. The script also highlights the practical aspects of these systems, such as the use of a handbook by small businesses and the automated processes of larger companies.

10:02

🛒 Calculating Total Purchases for a Business

The script provides a step-by-step guide to calculating the total purchases for a small business using a periodic inventory system. It includes various transactions such as direct purchases, refunds for spoiled goods, personal withdrawals, and additional stock purchases. The calculation involves adding all purchases and subtracting any refunds or withdrawals to arrive at the total purchase amount for the year, which is a crucial step in preparing financial statements.

15:04

📝 Drafting a Trading Account for Accounting

The paragraph outlines the process of drafting a trading account for a business, focusing on the year-end financial statements. It includes details such as sales, cost of sales, and gross profit, which are essential components of an income statement. The script also mentions additional services like extra classes for accounting students and the availability of a study guide in soft copy format, emphasizing the importance of preparation for upcoming exams.

20:06

📉 Trading Account and Profit Calculation

The final paragraph discusses the completion of a trading account, which includes the transfer of calculated purchase amounts and the addition of other relevant financial details such as opening stock, carriage on purchases, and sales. It also explains how to calculate profit or loss as a balancing figure by comparing the total sales and the sum of all costs and expenses. The script encourages viewers to subscribe to the channel for access to all videos and additional learning materials.

Keywords

💡Inventory System

An inventory system is a method of organizing, tracking, and controlling a company's stock of goods. It is crucial for businesses to manage their supply chain effectively. In the video, the theme revolves around explaining two types of inventory systems and their applications. The script discusses how inventory systems are recorded in accounting and the differences between the two main types.

💡Periodic Inventory System

The periodic inventory system is a method used by businesses, typically smaller ones, to calculate their inventory at the end of an accounting period. It is characterized by manual counting of stock at specific times rather than continuous tracking. In the script, it's mentioned that small businesses like a 'P shop' use this system, and it involves manual recording in a handbook or notes.

💡Perpetual Inventory System

A perpetual inventory system is a method employed by larger companies that tracks inventory in real-time using computers or software. It allows for continuous monitoring of stock levels and automatic updates upon each transaction. The script contrasts this system with the periodic one, noting that it is used by 'big companies' and involves computerized tracking of inventory and cost of sales.

💡Cost of Sales

Cost of sales refers to the direct costs attributable to the production of the goods sold by a company. It is a critical component in calculating gross profit. The video script explains that under the perpetual inventory system, cost of sales is recorded at the point of sale, whereas in the periodic system, it is calculated at year-end using a formula involving opening stock, purchases, and returns.

💡Small Business

A small business is an enterprise that is independently owned and operated, with a smaller number of employees and less annual revenue compared to larger corporations. In the context of the video, small businesses are more likely to use the periodic inventory system due to their limited resources and the cost associated with implementing a perpetual system.

💡Big Company

A big company, also known as a large corporation, has a substantial market presence, significant revenue, and a large number of employees. The script uses the term to describe businesses that are more likely to use a perpetual inventory system due to their ability to invest in the necessary technology and infrastructure.

💡Handbook

A handbook is a reference book offering comprehensive information on a particular subject. In the video, the term is used to illustrate how businesses using the periodic inventory system might record their inventory manually in a handbook or similar document, as opposed to using computer software.

💡Formula

A formula is a mathematical relationship between quantities. In the video, the formula for calculating the cost of sales in a periodic inventory system is given as 'opening stock plus purchases minus returns.' This formula is essential for determining the cost of sales at year-end for businesses using this system.

💡Stock Count

Stock count is the process of physically counting the inventory items on hand. The script mentions that under the periodic inventory system, a manual stock count, or 'fiscal stock count,' is conducted at year-end to determine the closing stock value, which is necessary for calculating cost of sales.

💡Trading Account

A trading account is a financial statement that summarizes a company's sales, cost of sales, and gross profit for a specific period. In the video, the script discusses drafting a trading account for a business, which includes the total purchases, opening and closing stock, and other relevant figures to determine the profit or loss.

💡Profit or Loss

Profit or loss is the difference between a company's revenues and expenses over a certain period. It's a measure of a company's financial performance. In the script, the calculation of profit or loss is demonstrated as a balancing figure in the trading account, showing the financial outcome of the business operations.

Highlights

Introduction to the concept of an inventory system, its importance in accounting, and its role in a balance sheet.

Explanation of two inventory systems: Periodic and Perpetual, and their distinct characteristics.

Periodic inventory system is typically used by small businesses due to its simplicity and lower cost.

Perpetual inventory system is preferred by larger companies, often utilizing computers and software for real-time tracking.

Difference in the recording of cost of sales between the two systems: Perpetual records at the point of sale, while Periodic at year-end.

The necessity of a fiscal stock count in the Periodic inventory system to determine the cost of sales.

Case study of Kumalo Curious, a small business owner who uses the Periodic inventory system.

Reasons for choosing the Periodic inventory system: lack of computers and the nature of a small business.

Calculation of total purchases for the year-end, including various transactions and refunds.

Drafting a trading account in the ledger for a given year-end, showcasing the process of accounting for sales and purchases.

The importance of distinguishing between carriage on purchase and carriage on sales in the context of inventory accounting.

Explanation of how to calculate carriage on purchase based on distance traveled and fuel consumption.

Determination of profit or loss as a balancing figure in the trading account, highlighting the accounting process.

Emphasis on the importance of subscribing to the channel for access to exclusive educational content.

Availability of a study guide for grade 11 accounting, offered as a soft copy to reduce costs.

Promotion of extra classes for a fee, aiming to prepare students for their final exams.

Encouragement for viewers to subscribe and engage with the content for better learning opportunities.

Transcripts

I 11 student so in this video we are

going to do inventory system so

basically inventory system guys is a

term three topic H which we are going to

cover together with a cash budget as

well as uh cost accounting which is

known as manufacturing so the question

paper that I have here uh is going to

deal with inventory system okay so

because uh this is the first video that

I did in

2024 for inventory system I'm going to

first explain to you uh what is the

meaning of invented system remember guys

when we said inventory you know it from

your balance sheet as you did it on the

previous term when we talk about

inventory guys we are talking about a

stock so in accounting we have a system

that you can record

that stock or that inventory okay we

have only

two we have

two inventory

system H number one you're going to have

a system which is

called

periodic inventory

system system okay

then after that we're going to do some

different then number

two this is number

one H this is number two number two is

called

P to

inventory

system okay this is two inventory system

that you are going to deal with in

accounting

okay now we have to know the differ

between these two so that we can go to

our question paper before we go to

question paper guys we must know the

difference between these two okay let's

try to lay them down so that you will

understand H whatever that we are going

to do this site you will have some

knowledge okay when you see these two

invented system guys number one that you

need to identify is that periodic

invented system is

used by small

business small businesses okay for

example guys it's used by P

shop whereas a Perpetual inventory

system is

used

by a big

companies okay for example you can just

say h Shop

right all right that's the first thing

that you that must come in your mind

periodic is for small business Perpetual

is for big company now let's go to the

differ number two when it come to

Perpetual inventory

system this business have

computers

computers to record

a

stop or to record inventory in other

words computer or a software are the

only one that are going to count what a

stock but when it come to periodic guys

as shop does not have a software does

not have a computer they use what we

call a

handbook they use a

handbook or you can just say some notes

return by

pen to record a

stock that's what they do under a

periodic inventory system if you go to

the SP shop guys when you buy something

that person or the cashier is going to

write down that um this time we have

sold for cold drink but spa or shop

right they don't do that a computer is

going to

to do that so this different guys is the

main different that you need to know now

the last one which is more important as

well under Perpetual inventory system

when it come to treatment of cost of

sales cost of sales is

recorded cost cost of

sales is

recorded at a

point of sale in other words guys when

you buy at Shop Right if you buy at Shop

Right the software is going to record

the cost of sales of that cold drink

immediately at the point of sales but

when it come to periodic invent system

guys you have to wait for the year end

because inventory system periodic

inventory system record a

cost of

sales at the the year

end the reason why cost of sales record

a cost of sales at the year end is

because they use a

manual they use a

manual

formula to

calculate

cost of sales in other words guys when

you are asked about

Perpetual inventory system you will not

be required to calculate cost of sales

but periodic expect some calculation of

cost of sales because you're going to

use a formula to calculate what your

cost of sales a formula of cost of sales

it says opening stock plus

purchase minus

returns okay you can add a courage on

purchase then you

less a

closing St so you see that at a point of

sales under periodic you can calculate

what a cost of sales because a formula

require closing stock and closing stock

you have to wait for the year end to

count how many stock you have so under

periodic they do what we

call a

fiscal stock

count in other words they count talk by

one by one like one two 3 that's how

they count until everything is completed

okay but under Perpetual inventory

system uh a

software software or

computer is going to do the job just

like that that's the different that you

need to know about uh this to system now

let's go straight to the question paper

I hope you have some understanding okay

they say zakum return a small curious

job okay run is run a small curious job

called kumalo curious in St luia and all

items that are sold in the shop are

purchased from community members to

assist them in making an income to to

support their family okay then kumal

curious uses a periodic inventory system

to calculate the cost of sales now you

know that kumalo use a periodic and you

have understanding of what is periodic

okay

3.1 mention two possible reason that Z

choose to use periodic invent system why

choose a periodic guys instead of using

a perpetual

what could be possible reason number

one she does

not

have

computers guys if you don't have

computers there is no way that you can

use Perpetual because you're going to

need a software that is going to do what

to calculate everything ER automatic

then reason number

two uh is that she's running a small

business a

small

business so guys if you're running a

small business

ER remember computer are very

expensive and if you are making a profit

of 200 you can't buy a a computer that

is going to cost more than 10,000 it's

not going to make sense so it's a small

business okay so obviously the company

does not make a lot of money that's why

she

chose a periodic inventory system okay

3.2 calculate a business total purchase

for the year end 31 July 2022 all

right uh with have information number a

they give us a

balances okay they give us stock on hand

and we also have a purchase encourage

and purchase then the one that we are

going to take here is purchase because

we are calculating all purchase that

have been made in the business if there

is any written

donation uh we have to subtract them or

if there is a withdrawal we have to

subtract all purchase we add okay the

first purchase uh it was amount of

241 200 then we go to information number

B which is related to purchases number

one they said 5 larger wooden animal

Cravings were purchased from Mr mja for

350 each okay they purchase a five

larger wooden Animal by 350 in order for

us to get total how much Purchase cost

we have to multiply 5 by

350 uh which is going to give us 1,

1,750 okay moving to the next one

homemade h vegetable Piglet and Gem were

purchased from Mrs gasa for a total of

1,220 okay and they say unfortunately

four bottle of pet were spoiled and

could not be sold Miss gasa refunded Z

it for this spoiled item okay firstly we

must add what was purchased which is

1,220 but he refunded which we have to

subtract he refunded

this 8 is not for each they said for

this which means that for all four uh

spoiled items she refunded 80 okay which

means that one was costing 20 the next

one they

said Crocket clothing and clothes

purchased from Miss goom for

4,500

Zama took one of this item costing 250

for personal use okay firstly we must

add what was purchased and subtract a

withdrawal withdrawal personal use is

withdrawal it's not part of a purchase

we have to subtract it because she took

it for personal use it's no longer with

us as a business okay we're going to say

plus

uh amount is how much how much how much

4,500 then we minus we are just

continuing

minus um 250 for personal use okay and

the other stock item purchase from walk

in

sellers we purchase another one of

10,000

820 then we're done with purchase so if

you

calculate the total is going to give you

two 159 160

okay now the next

question uh they say that we have to

draft a trading account in The Ledger uh

for the year end 31 July

2022 okay before we go to the last one

account guys those who want to attend

our extra class extra class are still

available at only 100 um per month so

you attend twice this semester we have

added another day because remember last

semester we used to attend only once a

week now we are doing twice so that we

can try to cover many many many many

many question papers before you write

your what your test because a third time

guys we are approaching the final exam

of the October which you are going to

write around October so now we have to H

prepare you as much as possible so that

you will be very ready H when you write

your final examination so that you can

go to grade 12 PR and also guys those

who want a study guide for grade 11 it

took very long time for us to complete

it because we have to go through some

editing recheck and so on and so on so

now we manage to complete everything and

the guide for grade 11 accounting is

available unfortunately for now H the

guide uh which is available is only soft

copy the reason is because to make a

hard go guys h is going to make a study

guide very very expensive because the

cost of printing out the cost of making

delivery yeah is going to make a stud

guide costly according to the codes that

we try to do and going up and down and

so on and so on so the guide that is

available now is a soft copy which is

costing only 100 soft copy simply means

that it's in terms of PDF okay you can

just contact us on WhatsApp and make

your purchase and get questions like

this one which you're going to practice

for for for your test okay now let's

proceed to the last one a trading

account I hope you are following

remember the calculation that we did of

purchase we are still going to put it

here remember we have a purchase here so

now guys a trading account format it

does not change whatever that you see on

the debit side is going to be like this

for

credit side is going to be like this

forever it's like income statement we

start with sales cost of sales gross

profit every day even here it's going to

be like this okay this account amount

we're just going to transfer it here

which is

259 160 just like that and there's a

chocolate Mark here obviously whether is

correct or not they're going to give you

a mark okay now the next one is opening

opening balance guys it was given on top

they give us opening stock which is

23700 okay and carriage on purchase we

have it on the table it's

5,700 we need to check further

information which is number c

information number c guys they say due

to community members not always having a

transport to deliver item to the shop Z

often collect them from their home okay

courage on purchase that we put here

guys is courage on purchase not courage

on sales courage on sales is delivery to

customer it's not form part of car

purchase here we are looking for car

purchase only yes this one is related to

Caron purchase I'm just emphasizing okay

this this month she travel

three h 75

kilom and they said that Z has

calculated that her vehicle use

approximately 5 lit of petrol every 100

kilm you need to take what he travel

divide by is always 100 here and you m

by 5 L then you going to get amount

which you're going to multiply by a

current foil price is 26

40

26 foot the only thing that that change

here guys is how many kilometers she

travel

and this five five is depend on the

vehicle

guys that you driving so if you're

driving a small car obviously it's going

to cost to less but if you're traveling

more it's going to cost more okay and

here if you do this calculation you're

going to get a carage that you're going

to add which is for 95 and when you add

it together it's going to give you 6,1

95 just like that okay a closing

stock uh number D and E A total cash

taken for for the year amounted to 3

95200 that's a sales a total cash taking

is a sales okay then on 31 July Z

completed her annual stock take and

determine that uh the stock is valued

28,400

you see this is the last transaction

because she firstly count using hand how

many stock left she she use a hand

because it's periodic okay then she

found that the value is

28,400 now we are going to calculate

profit or loss as a balancing figure

obvious the higher side is this one okay

so this part is very simple we are going

to do it but guys if you EV subscribe to

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the YouTube is going to recommend you

more videos so that you going to H watch

and learn Okay then if you calculate

this side H you will

get

423

600 H

423

600 and balancing figure you take this

one minus this one which is going to

give you profit or loss of 134

5 4 five and you just carry down this

balance 28 400 you carry down closing

guys you don't come to opening and carry

it down here it won't going to make

sense I hope you learn and I'm going to

see you on the next video